Question

list and explain in details the various methods of delayed or advanced revenue recognition.

Answer 1

REVENUE RECOGNITION is an accounting principle under GGAAP that determines the specific conditions under which revenue is recognized or accounted for

Sales Basis Method

With the sales basis revenue recognition methods, revenue is recorded at the time of sale. Sale is defined as the period of time where goods and services change hands, which may or may not be at the same time as payment.

For example, if a customer makes payment before they receive delivery of the product, the revenue isn’t recognized until the product is delivered.

Percentage of Completion Method

The percentage of completion method for recognizing revenue is typically used in large or long-term projects. Firms that provide construction services, engineering services or other services with long projects are most likely to use this method. Providers of these services need to be able to demonstrate that they are generating revenue even though projects are not yet complete.

Completed Contract Method

When the completed contract method is used, revenue is recognized only once the project is complete and the contract is fulfilled. This method applies to both revenue and expenses. The only time this revenue recognition method is used is when the requirements of the percentage of completion method are unable to be met. For example, if a contract is not enforceable or if completion percentage cannot be calculated

Cost Recoverability Method

The cost recoverability method takes a completely different approach to revenue recognition. Rather than recording revenue and offsetting those revenues by expenses, the cost recoverability method does not record any revenue until all of the project costs are accounted for.

Installment Method

When companies cannot rely on their customer’s ability to pay in a timely manner, the installment revenue recognition method may be best suited for the organization. With the installment method, revenue is only recorded once the organization has received payment.

Updated Revenue Recognition Method

While the old standard had rules with different requirements for revenue recognition by industry, the updated standard now has a principled approach to revenue recognition for all organizations.

While the updated standard will likely touch all organizations, those organizations with business operations driven by customer contracts will see the greatest impact