Main Revenue Recognition Principle

Exploring every revenue recognition principle is important to understand how revenue should be recognized in different transactions.

Defining revenue concept I have already mentioned that revenue is measured by the amount charged to customers for goods delivered or services provided to them. The question is when revenue should be recognized? To which accounting period revenue should be attributed, i.e. current period or deferred to the future period?

There several main recognition principles, however it is essential to remember that in all cases despite the applied revenue recognition principle, the criteria of recognition should agree with the terms of agreement with the customer on the sale of goods or provision of services and also should be based on the objective evidence supported by documents of the transaction performed.

The main revenue recognition principle is the following:

Sales Basis or Point Of Sale:

In this case revenue is recognized on the basis of sales that are made by the business. Sales in both it forms that is cash and credit is taken into consideration while calculating the revenue for a particular period.

Recognition moment is the moment when the title to the goods or services passes to the customer. In this case the customer has a legal right of ownership to the goods or services and the seller has a right to claim payment for the sale made or have already received the payment.

It is important to understand that applying this method revenues are not recognized when the sales agreement is signed with the customer, but recognition moment should correspond to the transfer of the ownership right to the customer.

The following accounting journal entries are made to record revenue:

Date	Description	D	C
Ownership transfer date	Cash or Accounts Receivable	XXXX
	Revenue		XXXX
	Recognition of sales revenue

In case customer pays for goods by cash Cash account will be debited while journalizing sales revenue. In case the customer will pay later after the receipt of goods, Account Receivable account will debited while journalizing sales revenue. Revenue is recognized without taking into account the date of payment, i.e. even if the customer will pay for the goods or services later after the ownership transfer date.

Let's analyse practical example:

On the 25th of March company ABC signs a contract with company XYZ for the sale of goods (chairs). Price for one chair will be $30 and total quantity to be sold is 500 chairs. According to the agreement the chairs will be delivered to the warehouse of the customer (company XYZ) on the 2nd of April and the customer will become legal owner of the goods on that day. The customer will pay for the goods within 30 days from the delivery date.

When should revenue be recognized in accounting? On 25th of March or on 2nd of April? Applying point of sale revenue recognition principle, since the ownership title to the goods will pass to the customer XYZ company on 2nd of April, sales revenue amounting to $15.000 ($30*500) should be recognized in April, despite the payment will be received after 30 days from the delivery date. So on the 2nd of April the following journal entry will be made in the books of company ABC:

Date	Description	D	C
April 2, 2009	Accounts Receivable	$15.000
	Revenue		$15.000
	Recognition of sales revenue

The next revenue recognition principle is cash revenue recognition principle.

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