Question

1. Revenue is usually recognized for accounting purposes when a performance obligation is satisfied. In some situation, revenue is recognized over time as the fair value of assets and liabilities. In other situation, however, accountants have developed guidelines for recognizing revenue at the point of sale.

a. Explain and justify, why revenue is often recognized at time of sale.

b. Explain in what situations it would be appropiate to recognize revenue over time.

Answer 1

Various standards for revenue recognition uses different terminologies but use the quite similar concept for revenue recognition which generally requires to recognize the revenue when it is certain to collect the same and performance obligation for the same has been satisfied.

Generally, in most of the cases, sales is the point of time where goods are transfered in possession to the customer i.e. also the performance obligation for the revenue recognition. In case of services also, invoice is raised generally after the performance of the services. Therefore, it is correct to recognize the revenue at the time of sale.

However, in situations where the service or sales of goods is divided over a period of time based on certain circumstances for example in case of construction contracts then it would be more appropriate to record the revenue based on the performance on the contract and recognise the same over period of time.