Methods of Revenue Recognition
Methods of Revenue Recognition
1. The Accrual Method of Revenue Recognition
The most common revenue recognition system is based on the accrual method. Under this approach, if the revenue recognition rules presented in the last section have been met, then revenue may be recognized in full. In addition, expenses related to that revenue, even if supplier invoices have not yet been received should be recognized and matched against the revenue. The name of this method does not imply that the revenue should be accrued—the name of this approach only applies to the accrual of expenses.
2. The Cash Method of Revenue Recognition
Revenue recognition under the cash method simply means that revenues are recognized at the point when cash is received from a customer that is in payment of a sale to that customer. There is no difference between the accrual and cash methods if sales are over-thecounter, but there can be a significant difference if the majority of sales are billed to customers, for which payment is received at some later date. The cash basis of revenue recognition is not recognized as an acceptable reporting method by GAAP, since it does not match revenues to related expenses.
3. The Installment Sales Method of Revenue Recognition
The installment method is used when there is a long string of expected payments from a customer that are related to a sale, and for which the level of collectability of individual payments cannot be reasonably estimated. This approach is particularly applicable in the case of multi-year payments by a customer. Under this approach, revenue is recognized only in the amount of each cash receipt, and for as long as cash is received. Expenses can be proportionally recognized to match the amount of each cash receipt, creating a small profit or loss at the time of each receipt.
4. Completed Contract Method of Revenue Recognition
In the construction industry, one option for revenue recognition is to wait until a
1. The Accrual Method of Revenue Recognition
The most common revenue recognition system is based on the accrual method. Under this approach, if the revenue recognition rules presented in the last section have been met, then revenue may be recognized in full. In addition, expenses related to that revenue, even if supplier invoices have not yet been received should be recognized and matched against the revenue. The name of this method does not imply that the revenue should be accrued—the name of this approach only applies to the accrual of expenses.
2. The Cash Method of Revenue Recognition
Revenue recognition under the cash method simply means that revenues are recognized at the point when cash is received from a customer that is in payment of a sale to that customer. There is no difference between the accrual and cash methods if sales are over-thecounter, but there can be a significant difference if the majority of sales are billed to customers, for which payment is received at some later date. The cash basis of revenue recognition is not recognized as an acceptable reporting method by GAAP, since it does not match revenues to related expenses.
3. The Installment Sales Method of Revenue Recognition
The installment method is used when there is a long string of expected payments from a customer that are related to a sale, and for which the level of collectability of individual payments cannot be reasonably estimated. This approach is particularly applicable in the case of multi-year payments by a customer. Under this approach, revenue is recognized only in the amount of each cash receipt, and for as long as cash is received. Expenses can be proportionally recognized to match the amount of each cash receipt, creating a small profit or loss at the time of each receipt.
4. Completed Contract Method of Revenue Recognition
In the construction industry, one option for revenue recognition is to wait until a