Chapter 5 Revenue Recognition

What is performance obligation?

A promise to transfer goods or services to a customer. Performance obligations are satisfied when the seller transfers CONTROL of goods or services to the customer. For example, Macy's sells a skirt to Susan for $75, how to record a journal entry: Cash (D) $75 Sales Revenue (C) $75 COGS (D) $40 Inventory (C) $40

What is the revenue recognition criteria?

An accounting standard that helps ensure that the appropriate amount of revenue appears in each period's income statement.

What are the key considerations when applying the 5 key steps to Revenue Recognition?

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Define revenue

Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. In simpler terms, revenue is the inflow of cash or accounts receivables that a business receives when it provides goods or services to its customers.

What are the 5 key steps to recognizing revenue?

Step 1. Identify the contract with a customer Step 2. Identify the performance obligation(s) in the contract Step 3. Determine the transaction price Step 4. Allocate the transaction price to each performance obligation Step 5. Recognize revenue when (or as) each performance obligation is satisfied

What is the criteria for recognizing revenue over time?

When a performance obligation is satisfied over time, revenue recognized in proportion to the amount of the performance obligation that has been satisfied. Revenue is recognized over time if either: 1. The customer consumes the benefit of the seller's work as it is performed, as when a company provides cleaning services to a customer for a period of time, or 2. The customer controls the asset as it is created, as when a contractor builds an extension onto a customer's existing building, or 3. The seller is creating an asset that has no alternative use to the seller, and the seller has the legal right to receive payment for progress to date, as when a company manufactures customized fighter jets for the U.S. Air Force

What is the core revenue recognition principle?

When companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

What is single point in time revenue recognition?

upon delivery