Revenue Recognition Rule - Cash Basis
Next revenue recognition rule is cash basis, i.e. revenue is recognized on a cash basis. Under this rule recognition of revenue is delayed until payment for goods or services is received, which means that revenue is considered to be earned only when the cash for goods or services is collected, despite the time when actual sale was made.
This revenue recognition rule is widely applied by physicians, attorneys, other businesses delivering professional services.
This method does not have theoretical justification and does not correspond to the accrual accounting principle, however it is simple and there is no necessity to estimate and account for losses from uncollected debts from customers, i.e. bad accounts receivable.
Important to understand that for the purpose of calculating business taxes such method may not be allowed.
The following accounting journal entries are made to record revenue:
Date |
Description |
D
|
C
|
| Cash receipt date |
Cash |
XXXX |
|
| |
Revenue |
|
XXXX |
| |
Recognition of sales revenue |
|
|
So according to cash basis revenue recognition rule revenue is recognized only then cash for delivery is received and there is no accounts receivable recorded.
Let's analyze practical example:
On the 15th of March company ABC provided legal services for $500 to it's customer Mr. Light. Mr. Light paid for the services on 17th of March.
When should revenue be recognized in accounting? On 15th of March or on 17th of April? Applying cash basis revenue recognition rule, revenue is accounted for in the books of ABC company on 17th of April, i.e. when payment for the services provided was received.
The following journal entry is made
Date |
Description |
D
|
C
|
| March 17, 2009 |
Cash |
$500 |
|
| |
Revenue |
|
$500 |
| |
Recognition of sales revenue |
|
|
The next revenue recognition rule is Installment Rule or Installment Method.
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Related readings
 Definition of Accounting Revenue
Main revenue recognition principle
Basic Concepts of Revenue Recognition - Installment Rule (Method)
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