Right way to recognize revenue

Royalties have a carve-out exception as sales-based royalties; therefore the franchisor continues to recognize them as the underlying sales occur, and accrues for royalties earned but not yet received.

By following the matching principle, businesses reduce confusion from a mismatch in timing between when costs expenses are incurred and when revenue is recognized and realized.

revenue recognition process

Key Terms fixed asset: Asset or property which cannot easily be converted into cash, such as land, buildings, and machinery. Recognition of Revenue After Delivery There are three methods that recognize revenue after delivery has taken place: the installment sales, cost recovery, and deposit methods.

Provided by: Boundless. Key Terms conservatism: A risk-averse attitude or approach; for accounting purposes, it relates to disclosing expenses and losses incurred immediately and delaying the recognition of revenues and gains until realized.

Since most sales are made using credit rather than cash, the revenue on the sale is still recognized if collection of payment is reasonably assured. Examples would include the development of internal software and certain types of land.

Another indicator is whether a service is optional or a required component of service. However, companies can easily resolve many recognition questions if they adhere to the principle that revenue should be realized or realizable and earned before it can be recognized.

The matching principle, along with revenue recognition, aims to match revenues and expenses in the correct accounting period. Just like revenues, the recording of the expense is unrelated to the payment of cash. The company delivers the products but does not receive payment until 30 days after the delivery.

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Revenue Recognition