Revenue Recognition

Question 1

What are accounts reciebable

Answer 1

It is when the revenue for a sale has been recorded on the balance sheet, without money being exchanged.

Question 2

What is the general rule?

Answer 2

Revenue is recognised in the period in which it is earned, which may not be the same as the period that the cash is collected from the customer.

Question 3

What is unearned revenue

Answer 3

If cash is recieved before transfer of the goods then unearned revenue (a liability) is recorded on the balance sheet.
Eventualy being recognised as revenue as soon as the goods are transferred to the buyer.

Question 4

What is the principles based approach to revenue recognition

Answer 4

1. Identify contract with customer
2. Identify the seperate or distinct performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when the entity satisfies the obligation

Question 5

What is a contract?

Answer 5

agreement between two or more parties that specifies their obligations and rights

Question 6

What is a performance obligation?

Answer 6

A promise to deliver a good or service
A distinct good or service is one that the customer can benefit from on their own
and the promise to transfer the good or service can be identified serpately from otherpromises

Question 7

When should a firm recognise revenue

Answer 7

When it is highly probable that it will not have to reverse it
- when the performance obligation has been satisfied e.g. physical possessions, acceptance, taking legal title/rights of payments