Suppose a company sells a product, prepares an invoice for the customer
(debiting accounts receivable and crediting sales, and then sends the
invoice to the customer. Suppose further that the company does not send
the product to the customer until payment is received. When does the
company recogize revenue?
I maintain that if payment is reasonable assured, revenue is recognized
at point of sale (when the invoice is generated) and that the delivery
terms (the item is sent to the client after payment is received) does
not even enter the equation. Is this correct? Thanks.
At point of sale, or when reasonably completed (in the case of services,
just an FYI). Sale isn't by DEFAULT when the invoice is generated. The
POS could be FOB destination, the point at which the customer
essentially receives the goods (when title passes). However some
products aren't completed all at once. For instance, a magazine
subscription... you can only recognize revenue as that product is
delivered (monthly subscription whose invoice was for $120/year, you
recognize $10/mo in revenue... the remained is held in Unearned Revenue,
a liability account with a misleading name :)
Don't automatically associate receipt of payment with revenue
recognition. They don't go hand-in-hand. Receipt of payment would
relieve a liability if it doesn't also coincide with transfer of title.
Thanks for the response. Suppose this product is, for example, a small
clock. Would revenue in this case be recognized at point of sale or
when the clock is sent or some other time?? Thanks again.
Holly J. Sommer wrote:
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