LO6-1

Revenue recognition

The rules for deciding when and how much revenue a company records.

Core revenue-recognition principle

Record revenue when goods or services are transferred to the customer for the amount the company expects to receive.

What do the five revenue-recognition steps belong to?

They are the process used to apply the core revenue-recognition principle.

What is Step 1 of revenue recognition?

Identify the contract with the customer.

What is Step 2 of revenue recognition?

Identify the performance obligations in the contract.

What is Step 3 of revenue recognition?

Determine the transaction price.

What is Step 4 of revenue recognition?

Allocate the transaction price to the performance obligations.

What is Step 5 of revenue recognition?

Recognize revenue when or as each performance obligation is satisfied.

What is the five-step order?

1. Contract 2. Performance obligations 3. Transaction price 4. Allocate 5. Recognize revenue

Revenue

Income earned from a company’s normal business activities, such as selling products or providing services.

Contract

An agreement between a seller and customer that creates rights and responsibilities.

Customer

A person or business that receives goods or services in exchange for payment.

Performance obligation

A promise to provide a good or service to a customer.

Transaction price

The amount the seller expects to receive from the customer under the contract.

Allocate

To divide or assign the transaction price among the different performance obligations.

Recognize revenue

Officially record earned revenue in the accounting records.

Satisfied performance obligation

A promise is satisfied when the promised good or service has been transferred to the customer.

Transfer

Giving control of a good or service to the customer.

Control

The customer can use the good or service and receive its benefits.

Entitled

Having the legal right to receive something, such as payment.

Goods

Physical products sold to customers, such as shoes, computers, or coffee.

Services

Work performed for a customer, such as cleaning, repairs, or a subscription.

What does recognizing revenue when an obligation is satisfied mean?

Record revenue at one specific point in time, such as when a customer receives a laptop.

What does recognizing revenue as an obligation is satisfied mean?

Record revenue gradually over time, such as providing a one-year subscription.

Macy’s sells Sofia a jacket for $75. Step 1: Contract?

Agreement to purchase the jacket.

Macy’s sells Sofia a jacket for $75. Step 2: Performance obligation?

Deliver the jacket.

Macy’s sells Sofia a jacket for $75. Step 3: Transaction price?

$75.

Macy’s sells Sofia a jacket for $75. Step 4: Allocate?

All $75 goes to the jacket.

Macy’s sells Sofia a jacket for $75. Step 5: Recognize revenue?

Record $75 when Sofia receives control of the jacket.