Revenue earned by a business enterprise is recognized for accounting purposes at

Question

Revenue earned by a business enterprise is recognized for accounting purposes at different times, according to the circumstances. In some situations, revenue is recognized appropriately as it is earned in the economic sense. In other situations, revenue is recognized at point of delivery.

Required: 1. Explain and justify why revenue often is recognized as earned at point of delivery. 2. Explain in what situations it would be useful to recognize revenue as the productive activity takes place. 3. At what times, other than those included in (1) and (2) above, may it be appropriate to recognize revenue?

Explanation / Answer

Answer 1

The revenue often is earned during a period of time, and usually recognized at a point time when both revenue recognition criteria are satisfied. These criteria usually are satisfied at the point of delivery as when the revenue has been earned and there is reasonable certainty of collecting the cash for the sales.

However there are significant uncertainties which exist at the time products are produced. At point of delivery, the product has been sold and the price and buyer are known. However there is one uncertainty which remains which involves the ultimate cash collection. This can usually be accounted for, i.e. by estimating and recording allowances for possible return of the product and for non-collection of the cash.

Answer 2:

This would be useful to recognize revenue for the productive activity which takes place when the earnings process occurs over long periods of time. It takes time to deliver the final product for example; a long-term projects in the construction industry.

Answer 3:

There are situations sometimes when the revenue-producing activities call for revenue recognition after the product has been delivered. These situations involve significant uncertainty as to the collection of the cash. This is caused either by the possibility of the product being returned or, with credit sales, the possibility of bad debts. Usually, these remaining uncertainties can be accounted for by estimating and recording allowances for anticipated returns and bad debts, thus allowing revenue and related costs to be recognized at point of delivery. But occasionally, an abnormal degree of uncertainty causes point of delivery revenue recognition not to be appropriate. Revenue recognition after delivery sometimes is appropriate for instalment sales and when a right of return exists.

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