Essay Title: 

Revenue Recognition

March 24, 2016 | Author: | Posted in accounting, mathematics and economics



Revenue Recognition


Financial reporting is a mean of controlling business activities . It is the window of information for owners and investors that lack direct interactions with everyday operations . It provides financial insights which are the primary measurement factors of business success or failure . Because of its importance , there is a huge need for transparency and accuracy in financial reporting . With regards of those needs , the Financial Accounting Standard Board (FASB ) has always put emphasize on efforts of producing the most appropriate standards for financial [banner_entry_middle]


One of the most important financial reporting principles is that of revenue recognition . Revenue is the factor that displays corporate abilities to fulfill its responsibilities to stakeholders and furthermore , to sustain growth . Thus , professional accountants and standard-setters put great attention on how revenues are measured and recorded in financial reporting . Within this we will discuss the current FASB standards regarding revenue recognition , the problems and issues within the current standards , and provide a set of recommendation for future standard-setting purposes

The Generally Accepted Revenue Recognition Principle

According to Kieso , Weygant and Warfield (2004 , the current revenue recognition principle contains general guidelines of when revenue should be recognized in daily financial reporting activities . According to this principle , revenue is generally recognized when realized , realizable or earned

The first principle , revenue must be recorded when it is realized , means that revenues can only be recorded when goods or services are exchanged fro cash or claims to cash . For example , revenues for a candy bar company should only be recorded when the candy bar is sold and cash is received from buyer . This principle applies for most companies and especially retail companies

The second principle , revenues are recorded when it is realizable , means that revenues can be recorded when the products are readily convertible to cash or claims to cash . This principle applies when the production activities have almost 100 chance of resulting sales , for example producers of customized furniture . These producers worked based on , in the sense that all production activities will lead to an actual sale and revenue . For these types of producers , the FASB allowed revenue recognition when all production activities required to finish the product has been accomplished

The third principle , revenues are recorded when they are earned , means that revenue can be recorded when the entity has substantially accomplished what it must do to entitle the benefits represented by the revenues . This principle applies for companies which require more than one financial period to produce each of its products , for example airplane makers or cruise-ship makers . In the end of each financial period , these companies recognize revenues from their un-sold merchandise based on the percentage of completion of the production activity

With regards of the principles stated above , we can conclude several methods of recognizing revenues , they are

Recognition at the time of sale

Although considered as the strongest method for revenue recognition , a uniform application of this method will result protests from several industries with rather… [banner_entry_footer]

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