revenue recognition

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.


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

factory indirect materialsassets have debit balancefica medicare ratesvariable costing income statement exampledoes accounts receivable go on an income statementdouble declining balance depreciation tablehow do you calculate federal withholding from a paycheckexamples of current liabilities in accountingprocess raw goodshow to calculate roi from financial statementshow to calculate the cost of goods manufacturedformula for calculating gross salarywhat is variable expenses examplessales returns and allowances journal entrytrial balance spreadsheetunearned revenue is initially recognized with aprepayment journal entryperpetual discounttrial balance adjustments examplemanagerial accounting job order costingnormal debit and credit balancescalculate state withholdingprice takers examplehow to subtract taxes from your paycheckwhat is the journal entry for accrued expensesfinancial accounting depreciation methodscogs accountingwhat are conversion costs in managerial accountingformula to calculate net payretained earnings formula on balance sheetdirect labor cost budgetaccruals journal entrieshow to calculate sales tax from total amountmanufacturing accounting entriescredit card accounting entriesschedule of cost of goods manufactured templatewhat is accounting equationoverhead rate per direct labor costfederal witholding tax ratewrite off receivablesjournal entry for accrualsaccounting adjusting entries tutorialhow to calculate interest expense on a loanwip accounting definitionstatement of cost of goods manufactured and soldhow to calculate dividends with retained earnings and net incomehow to calculate tax deductions for employee payrolldecline in value calculatorjournal entry for salary paid to employeeswhat is subtracted from sales to arrive at net salestake home pay calculator tennesseebank charges journal entrydebit depreciation expensefifo formulaexample of straight line depreciationsl depreciationhow to find retained earnings on a balance sheetaccounts payable journal entriesis prepaid expense an assetpayroll tax formulabank reconciliations examplescost of goods sold depreciationmachine depreciation calculatorjob costing journal entries examplesadjusting entries examplesaccounts payable debit or credit balancecalculate payroll withholdingare expenses debits or creditsbalance sheet closing entrieshow to compute manufacturing overhead ratewhat are examples of fixed expenses