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

how to calculate total fixed cost per unitaging of accounts receivable formula2014 fica tax ratesdefine warranteereducing balance method depreciation calculatorfifo and lifo accounting examplespayroll expense calculatorending inventory calculationhow to compute straight line depreciationdifference between perpetual and periodicdefine classified balance sheetdepreciation expense journal entrycost of direct materials used formulawarranty expense journal entrycost of goods manufactured equationhow to find unit contribution marginaccounting for repurchase of common stockplantwide overhead rate formuladifference between accounts payable and notes payableadjusting entries prepaid insurancemanufacturing overhead rate calculatorhow much is federal withholding tax ratemonthly simple interest calculatorcalculating net pay from gross payvariable costing vs absorption costingmerchandising transactions journal entriesexamples of owners equitypayroll journal entryjournal entry depreciation expensehow to record prepaid rent journal entryaccrual entries in accounts payableoverhead absorption rateformat of adjusted cash bookhow to find contribution marginmeaning of unearned revenuecompute the unit product cost under absorption costingfinancial accounting adjusting entries examplespv annuityoutstanding checks accountingnormal balance of retained earningsjournal entry for insurance premium paidformula for retained earningwhat is the percentage of social security tax withheldinterest on investment journal entrycalculate market value of bondwhat is bookkeeping to trial balancejournal entry for issuing stockperpetual discountcalculate medicare taxcost of good sold balance sheethow to do bank reconciliation exampledirect write off method vs allowance methodnet income calculator floridabest book on financial accountingwhat inventory system does walmart usesingle overhead rateshutdown decision in management accountingfifo and lifo calculatorwip accountingsalvage accountingsegmented bowl calculatordouble declining balance depreciation tablehow to calculate variable expenses per unitrecording payroll journal entriessell thru calculationbond maturity datesvariable cost per unit calculationcalculating interest on notes payableaverage variable cost calculatoroverhead variancesoverhead ratesaccounts receivable are normally reported at thefixed and variable costs formulaallowance for doubtful debtsjournal entry of accrued interesta debit balance in retained earningsaccounting adjusting entries tutorial