Revenue Recognition Core Principle: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 and services When:upontransferto customers How much:amount the seller isentitled to receive It is important not only to determinehow muchrevenue to recognize (record), but alsowhento recognize it.
Five Steps to Recognizing Revenue 1. Identify the contract • Legal rights of seller and customer established 2. Identify the performance obligation(s) • A performance obligationis a promise to transfer a good or service that is distinct, which is the case if the good or service is both: • (a) capable of being distinct and • (b) separately identifiable. - Single - Multiple ( a right of return is not a performance obligation but instead a variable consideration that will reduce the revenue at the point of sale).
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