Chapter 5
Revenue: inflow of cash or accounts receivable that a business receives when it provides g/s to its customers
Core revenue recognition principle: companies recognize revenue when g/s are transferred to customers for
the amount the company expects to be entitled to receive in exchange for those g/s
Five Steps Used to Apply the Principle
Step 1 Identify the contract with a customer
Step 2 Identify the performance obligation(s) in the contract
Step 3 Determine the transaction price
Step 4 Allocate the transaction price to each performance obligation
Step 5 Recognize revenue when (or as) each performance obligation is satisfied
Performance obligations: promises to transfer g/s to a customer
- Recognizes revenue when it satisfies a PO by transferring the promised g/s
- transfer complete when customer has control (customer has direct influence over the use) of the g/s
i.e. Macy’s sells a skirt to Susan for $75 that Macy’s previously purchased from a wholesaler for $40
Step 1: contract may not be written but it is clear- Macy’s delivers the skirt to Susan, Susan agrees to pay $75
Step 2: Macy’s has only one single PO- to deliver the skirt
Step 3: Macy’s is entitled to receive $75 from Susan
Step 4: With only 1 PO, Macy’s allocates full transaction price of $75 to delivery of the skirt
Step 5: Macy’s satisfies PO as it delivered the skirt so now Macy’s records the following journal entries;
Cash 75
Sales revenue 75
Cost of goods sold 40
Inventory 40
Step 1: Identify the contract
Indicators that CONTROL has been transferred from the seller to the customer (apply to both g/s)
- An obligation to pay the seller
- Legal title to the asset
- Physical possession of the asset
- Assumed the risks and rewards of ownership
- Accepted the assets
* We recognize revenue over time if one of three criteria is met *
, Chapter 5
1. The customer consumes the benefit of the seller’s work as it is performed, as when a company
provides cleaning services to a customer for a period of time, or
2. The customer controls the asset as it is created, as when a contractor builds an extension onto a
customer’s existing building, or
3. The seller is creating an asset that has no alternative use to the seller, and the seller has the legal
right to receive payment for progress to date, as when a company manufactures customized fighter
jets for the U.S. Air Force
* Most long-term construction contracts qualify for revenue recognition over time *
Revenue: inflow of cash or accounts receivable that a business receives when it provides g/s to its customers
Core revenue recognition principle: companies recognize revenue when g/s are transferred to customers for
the amount the company expects to be entitled to receive in exchange for those g/s
Five Steps Used to Apply the Principle
Step 1 Identify the contract with a customer
Step 2 Identify the performance obligation(s) in the contract
Step 3 Determine the transaction price
Step 4 Allocate the transaction price to each performance obligation
Step 5 Recognize revenue when (or as) each performance obligation is satisfied
Performance obligations: promises to transfer g/s to a customer
- Recognizes revenue when it satisfies a PO by transferring the promised g/s
- transfer complete when customer has control (customer has direct influence over the use) of the g/s
i.e. Macy’s sells a skirt to Susan for $75 that Macy’s previously purchased from a wholesaler for $40
Step 1: contract may not be written but it is clear- Macy’s delivers the skirt to Susan, Susan agrees to pay $75
Step 2: Macy’s has only one single PO- to deliver the skirt
Step 3: Macy’s is entitled to receive $75 from Susan
Step 4: With only 1 PO, Macy’s allocates full transaction price of $75 to delivery of the skirt
Step 5: Macy’s satisfies PO as it delivered the skirt so now Macy’s records the following journal entries;
Cash 75
Sales revenue 75
Cost of goods sold 40
Inventory 40
Step 1: Identify the contract
Indicators that CONTROL has been transferred from the seller to the customer (apply to both g/s)
- An obligation to pay the seller
- Legal title to the asset
- Physical possession of the asset
- Assumed the risks and rewards of ownership
- Accepted the assets
* We recognize revenue over time if one of three criteria is met *
, Chapter 5
1. The customer consumes the benefit of the seller’s work as it is performed, as when a company
provides cleaning services to a customer for a period of time, or
2. The customer controls the asset as it is created, as when a contractor builds an extension onto a
customer’s existing building, or
3. The seller is creating an asset that has no alternative use to the seller, and the seller has the legal
right to receive payment for progress to date, as when a company manufactures customized fighter
jets for the U.S. Air Force
* Most long-term construction contracts qualify for revenue recognition over time *
