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WIKIBOOKS
DISPONIBILI
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ART
- Great Painters
BUSINESS&LAW
- Accounting
- Fundamentals of Law
- Marketing
- Shorthand
CARS
- Concept Cars
GAMES&SPORT
- Videogames
- The World of Sports

COMPUTER TECHNOLOGY
- Blogs
- Free Software
- Google
- My Computer

- PHP Language and Applications
- Wikipedia
- Windows Vista

EDUCATION
- Education
LITERATURE
- Masterpieces of English Literature
LINGUISTICS
- American English

- English Dictionaries
- The English Language

MEDICINE
- Medical Emergencies
- The Theory of Memory
MUSIC&DANCE
- The Beatles
- Dances
- Microphones
- Musical Notation
- Music Instruments
SCIENCE
- Batteries
- Nanotechnology
LIFESTYLE
- Cosmetics
- Diets
- Vegetarianism and Veganism
TRADITIONS
- Christmas Traditions
NATURE
- Animals

- Fruits And Vegetables


ARTICLES IN THE BOOK

  1. Account
  2. Accountancy
  3. Accountant
  4. Accounting cycle
  5. Accounting equation
  6. Accounting methods
  7. Accounting reform
  8. Accounting software
  9. Accounts payable
  10. Accounts receivable
  11. Accrual
  12. Adjusted basis
  13. Adjusting entries
  14. Advertising
  15. Amortization
  16. Amortization schedule
  17. Annual report
  18. Appreciation
  19. Asset
  20. Assets turnover
  21. Audit
  22. Auditor's report
  23. Bad debt
  24. Balance
  25. Balance Sheet
  26. Banking
  27. Bank reconciliation
  28. Bankruptcy
  29. Big 4 accountancy firm
  30. Bond
  31. Bookkeeping
  32. Book value
  33. British qualified accountants
  34. Business
  35. Business process overhead
  36. Capital asset
  37. Capital goods
  38. Capital structure
  39. Cash
  40. Cash flow
  41. Cash flow statement
  42. Certified Management Accountant
  43. Certified Public Accountant
  44. Chartered Accountant
  45. Chartered Cost Accountant
  46. Chart of accounts
  47. Common stock
  48. Comprehensive income
  49. Consolidation
  50. Construction in Progress
  51. Corporation
  52. Cost
  53. Cost accounting
  54. Cost of goods sold
  55. Creative accounting
  56. Credit
  57. Creditor
  58. Creditworthiness
  59. Current assets
  60. Current liabilities
  61. Debentures
  62. Debits and Credits
  63. Debt
  64. Debtor
  65. Default
  66. Deferral
  67. Deferred tax
  68. Deficit
  69. Deloitte Touche Tohmatsu
  70. Depreciation
  71. Direct tax
  72. Dividend
  73. Double-entry bookkeeping system
  74. Earnings before interest and taxes
  75. Earnings Before Interest, Taxes and Depreciation
  76. Earnings before Interest, Taxes, Depreciation and Amortization
  77. Engagement Letter
  78. Equity
  79. Ernst a& Young
  80. Expense
  81. Fair market value
  82. FIFO and LIFO accounting
  83. Finance
  84. Financial accounting
  85. Financial audit
  86. Financial statements
  87. Financial transaction
  88. Fiscal year
  89. Fixed assets
  90. Fixed assets management
  91. Fixed Assets Register
  92. Forensic accounting
  93. Freight expense
  94. Fund Accounting
  95. Furniture
  96. General journal
  97. General ledger
  98. Generally Accepted Accounting Principles
  99. Going concern
  100. Goodwill
  101. Governmental accounting
  102. Gross income
  103. Gross margin
  104. Gross profit
  105. Gross sales
  106. Historical cost
  107. Hollywood accounting
  108. Imprest system
  109. Income
  110. Income tax
  111. Indirect tax
  112. Insurance
  113. Intangible asset
  114. Interest
  115. Internal Revenue Code
  116. International Accounting Standards
  117. Inventory
  118. Investment
  119. Invoice
  120. Itemized deduction
  121. KPMG
  122. Ledger
  123. Lender
  124. Leveraged buyout
  125. Liability
  126. Licence
  127. Lien
  128. Liquid asset
  129. Long-term assets
  130. Long-term liabilities
  131. Management accounting
  132. Matching principle
  133. Mortgage
  134. Net Income
  135. Net profit
  136. Notes to the Financial Statements
  137. Office equipment
  138. Operating cash flow
  139. Operating expense
  140. Operating expenses
  141. Ownership equity
  142. Patent
  143. Payroll
  144. Pay stub
  145. Petty cash
  146. Preferred stock
  147. PricewaterhouseCoopers
  148. Profit
  149. Profit and loss account
  150. Pro forma
  151. Purchase ledger
  152. Reserve
  153. Retained earnings
  154. Revaluation of fixed assets
  155. Revenue
  156. Revenue recognition
  157. Royalties
  158. Salary
  159. Sales ledger
  160. Sales tax
  161. Salvage value
  162. Shareholder
  163. Shareholder's equity
  164. Single-entry accounting system
  165. Spreadsheet
  166. Stakeholder
  167. Standard accounting practice
  168. Statement of retained earnings
  169. Stock
  170. Stockholders' deficit
  171. Stock option
  172. Stock split
  173. Sunk cost
  174. Suspense account
  175. Tax bracket
  176. Taxes
  177. Tax expense
  178. Throughput accounting
  179. Trade credit
  180. Treasury stock
  181. Trial balance
  182. UK generally accepted accounting principles
  183. United States
  184. Value added tax
  185. Value Based Accounting Standards and Principles
  186. Write-off
 



ACCOUNTING
This article is from:
http://en.wikipedia.org/wiki/Revenue_recognition

All text is available under the terms of the GNU Free Documentation License: http://en.wikipedia.org/wiki/Wikipedia:Text_of_the_GNU_Free_Documentation_License 

Revenue recognition

From Wikipedia, the free encyclopedia

 

Revenue recognition principle is one of the four main principles in the US generally accepted accounting principles (GAAP). It is also the main difference between cash basis accounting and accrual basis accounting. In cash basis accounting revenues are simply recognized when cash is received no matter when and how the services were performed or goods delivered. In accrual basis accounting revenues are recognized when they are (1) realized or realizable and (2) earned no matter when cash is received.

General rule

Revenues are realized when goods and services are exchanged for cash or claims to cash (that is, receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has performed its duties to be entitled to compensation.

There are 4 main transactions of this kind:

  1. Revenue from selling inventory is recognized at the date of sale (usually interpreted as the date of delivery).
  2. Revenue from performing services is recognized when services have been performed and are billable.
  3. Revenue from permission to use company’s assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used.
  4. Revenue from selling an asset other than inventory is recognized at the point of sale.

USSEC's SAB104 states that revenue generally is realized or realizable and earned when all of the following criteria are met: 1) Persuasive evidence of an arrangement exists; 2) Delivery has occurred or services have been rendered; 3) The seller's price to the buyer is fixed or determinable; and 4) Collectibility is reasonably assured

Exceptions: revenues not recognized at delivery

The general rule says that revenue from selling inventory is recognized at the point of sale, but there are several exceptions.

  • Buyback agreements: buyback agreement means that a company sells a product and agrees to buy it back after some time. If buyback price covers all costs of the inventory plus related holding costs, the inventory remains on the seller’s books. In plain: there was no sale.
  • Returns: companies which cannot reasonably estimate the amount of future returns and/or have extremely high rates of returns should recognize revenues only when the right to return expires. Those companies which can estimate the number of future returns and have a relatively small return rate can recognize revenues at the point of sale, but must deduct estimated future returns.audouin

Exceptions: revenues recognized before delivery

Long-term contracts

This exception primarily deals with long-term contracts such as constructions (buildings, stadiums, bridges, highways, etc.), development of aircraft, weapons, and space exploration hardware. Such contracts must allow the builder (seller) to bill the purchaser at various parts of the project (e.g. every 10 miles of road built).

  • Percentage-of-completion method says that if (1) the contract clearly specifies the price and payment options with transfer of ownership, (2) the buyer is expected to pay the whole amount and (3) the seller is expected to complete the project, then revenues, costs, and gross profit can be recognized each period based upon the progress of construction (that is, percentage of completion). For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract. This method is preferred. However, expected loss should be recognized fully and immediately due to conservatism principle.
  • Completed contract method should be used only if percentage-of-completion is not applicable or the contract involves extremely high risks. Under this method, revenues, costs, and gross profit are recognized only after the project is fully completed. Thus, if a company is working only on one project, its income statement will show $0 revenues and $0 construction-related costs until the final year. However, expected loss should be recognized fully and immediately due to conservatism principle.

Completion of production basis

This method allows recognizing revenues even if no sale was made. This applies to agricultural products and minerals because (1) there is a ready market for these products with reasonably assured prices, (2) the units are interchangeable, and (3) selling and distributing does not involve significant costs.

Deposits

Making a deposit is not considered to be a sufficient evidence of sale, thus no revenue or sale is recorded until the sale is completed (that is, the whole price is paid or the delivery). The deposit is recorded as a liability.

Exceptions: revenues recognized after delivery

Sometimes, the collection of receivables involves a high level of risk. It usually applies to sales when periodic payments must be made over an extended period of time (e.g. home equipment, industrial equipment). In such case revenue recognition is deferred until the cash is received. And there are two methods to deal with this situation:

  • Installment sales method: it allows recognizing proportional gross profit on cash collection. For example, if a company collected 45% of total product price, it can recognize 45% of total profit on that product.
  • Cost recovery method is used when there is an extremely high probability of uncollectible payments. Under this method no profit is recognized until cash collections exceed the seller’s cost of the merchandise sold. For example, if a company sold a machine worth $10,000 for $15,000, it can start recording profit only when the buyer pays more than $10,000.

See also

  • US GAAP
  • Accounting methods
Retrieved from "http://en.wikipedia.org/wiki/Revenue_recognition"

  

 

 


 

 
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