When to Recognize Revenue

Revenue recognition is one of the most important concepts in accounting. Deciding when to record revenue and expenses can have a huge impact on the financial statements. Incorrectly recording revenue that has not been earned can inflate profits and give potential investors or lenders incorrect information about the company’s future profitability.

Revenue should be recorded when it is earned, essentially when the work is done. For some businesses, this is fairly simple. When I complete a tax return for a client, I have earned revenue. When a retailer sells a product, revenue is earned. It does not matter when payment is received; the work is completed and therefore the revenue should be recorded. Payments do not affect the recognition of revenue.

When deciding how to record transactions involving revenue, there are two important questions you should ask yourself:

  1. Did the company do the work?
  2. Did the company get paid?

The following chart should help guide you through the process of determining if revenue should be recognized.

 Rev1

Notice the first question is regarding the work. This is the most important factor. Once we have determined it work has been done, then we can look at payment information to determine what the debit should be in the entry.

Let’s look at some examples.

K’s Bounce House Adventures rents bounce houses to individuals and corporations for parties. K’s has the following transactions during the month of February. Record the necessary journal entries.

Feb 2 – K’s agrees to provide a bounce house for a corporate function on February 10 for $300. The companies sign a contract stating that payment will be made on the date of the function.

Feb 4 – K’s provides a bounce house for a birthday party and gets paid at the end of the party, $250.

Feb 5 – K’s provides two bounce houses for a town picnic, $700. K’s must bill the town and will receive payment within 30 days.

Feb 7 – K’s signs a contract to provide a bounce house for a birthday party on Feb 20 for $350. The contract requires the customer to pay 50% of the balance today and the rest the day of the party.

Feb 10 – K’s provides the bounce house for the contract signed on Feb 2 and is paid.

Feb 13 – K’s provides a bounce house for a function booked in January. The customer paid the entire amount of the contract, $275, when the function was booked.

Feb 20 – K’s provides the bounce house for the contract signed on Feb 7 and is paid the remaining balance.

Feb 25 – K’s receives the payment from the town event on Feb 5.

For each of the transactions, ask yourself the two questions above. The solutions are listed below with explanations. Try working through the transactions before looking at the solutions. Take notes on the transactions you had trouble identifying. Usually there is a pattern. Find your weaknesses and work on them. Write your own transactions for those types of entries.

Click here for the solutions to the transactions.

Related Videos:

Revenue Recognition

Basic Journal Entries, Part 1

Basic Journal Entries, Part 2

Share This:


Related pages


income statement for merchandising businessjob costing questions and answersmeaning of profit centrehow to find the contribution marginrecognition of unearned revenuewhat is current liabilities with examplesexample of straight line depreciationfixed costs vs variable costs examplesraw materials turnoverhow to adjust retained earnings in quickbooksdebits increaseaccrued expenses journalcorrecting entry accountingdebit and credit entries in trial balancefederal withholding calculationoperating profit to sales ratiowhat is double declining depreciationwhat are the differences between managerial and financial accountingasset disposal journal entryfixed overhead expensesbond amortization definitionnever buy a depreciating assetamortisation of bondshow to get manufacturing overheadexamples of selling and administrative expenseshow to find retained earningaccounting entry for provision for doubtful debtsformula for calculating cost of goods soldaccounting matching principlenormal balance of retained earningshow to calculate aging of accounts receivableemployer payroll tax calculatoractivity based costing stepshow to calculate prepaid insurance accountinginventory costing methodscost of good sold statement formattvc costdebit and credit accounts examplesdouble declining balance method examplevariable expenses exampleshow to record unearned revenuevariable costs equationcalculate profit margin ratiocalculating interest rate on a loan formuladeclining balance method calculatorloan write off accounting treatmenttake home pay calculator with overtimecorrecting entry accountingmanagerial accounting formula sheetaccounting accounts receivable journal entriesexamples of liability accountsmeaning of cash discountnet paycheck calculatormanufacturing wipallowance for doubtful accounts gaapsimple interest monthly payment formulaaccrued wages payablefinancial accounting formulasoverhead absorptiondouble declining depreciation calculatordisposal of fixed assets in balance sheetdouble entry of depreciationactivity based costing managerial accountingadjusting journal entries prepaid insurancedouble declining method examplecash discount in accountingtraceable fixed expensesdifference between perpetual inventory system and periodic inventory systemprepaid expenses journal entrieshow to subtract taxes from your paycheckhow to work out gp percentagebook reconciling itemspresent value chart annuityinterest accrued on notes payable adjusting entryhow to calculate the withholding taxhow do you calculate ending inventory