The following is an excerpt from a conversation between Monte Trask and Jamie Pa
ID: 2463309 • Letter: T
Question
The following is an excerpt from a conversation between Monte Trask and Jamie Palk just before they boarded a flight to Berlin on American Airlines. They are going to Berlin to attend their company's annual sales confcrence. Monte: Jamie, aren't you taking an introductory accounting course at college? Jamie: Yes, I decided it's about time I learned something about accounting. You know, our annual bonuses are based on the sales figures that come from the accounting department. Monte: I guess I never really thought about it. Jamie: You should think about it! List year, I placed a $900,000 order on December 27. But when I got my bonus, the $900,000 sale wasn't included. They said it hadn't been shipped until January 5, so it would have to count in next year's bonus. Monte: A real bummer! Jamie: Right! I was counting on that lx)nus including the $900,000 sale. Monte: Did you complain? Jamie: Yes, but it didn't do any good. Sophia, the head accountant, said something alxnit matching revenues and expenses. Also, something about not recording revenues until the sale is final. I figured I'd take the accounting course and find out whether she's just jerking me around. Monte: I never really thought about it. When do you think American Airlines will record its revenues from this flight? Jamie: Hmmm, I guess it could record the revenue when it sells the ticket... or when the boarding passes are taken at the door... or when we get off the plane... or when our company pays for the tickets... or 1 don't know. I'll ask my accounting instructor. QUESTION Discuss when American Airlines should recognize the revenue from ticket sales to properly match revenues and expenses.Explanation / Answer
The concept of "Revenue Recognition" states that revenue should be accounted for when all risks and responsibilities concerned with the same are achieved or completed. The tickets when sold to the flyers mean that the income has accrued for American Airlines. Hence, technically, when the flight begins, the revenue can be recorded, since that is when the trip of the flyer actually begins. This is the best method of accounting revenue in order to match revenue and expenses.
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