ACC 300 Lecture 07: Revenue Recognition, Receivables & Advances from Customers

Comprehensive vocabulary flashcards covering revenue recognition principles, unearned revenue, long-term contracts, installment and cost-recovery methods, accounts receivable, bad debt estimation, and sales returns.

Accrual Accounting

An accounting system that recognizes revenues and expenses when they occur, irrespective of cash payment.

Earned (Revenue Recognition Criterion)

The revenue recognition condition satisfied when the seller has substantially fulfilled its performance obligations.

Realizable (Revenue Recognition Criterion)

The revenue recognition condition satisfied when the seller has obtained an asset from the customer whose value can be measured reliably.

Matching Principle

The accounting rule of matching cost of goods sold (COGS) to the revenue generated while charging period expenses such as SG&A, rent, and R&D to the relevant period.

Advances from Customers

A liability account—also termed unearned revenue or deferred revenue—recorded when cash is received before the seller delivers goods or performs services.

Completed-Contract Method

A long-term contract accounting method in which revenue is recognized only upon final completion of the project.

Percentage-of-Completion Method

An accounting method that recognizes revenue and COGS according to project completion in each accounting period for qualifying multi-period contracts.

Subscription Accounting (Apple Historical Case)

An approach where revenue and associated cost of sales for iPhone and Apple TV were deferred and recognized across an estimated $24\text{-month}$ life.

Installment Method

A revenue recognition method used when collection is uncertain that assumes all promised installments arrive and recognizes the same gross margin percentage for each cash receipt.

Cost-Recovery Method

A revenue recognition method used when collection is highly uncertain, under which no gross profit is recognized until cumulative cash receipts equal total costs.

Deferred Gross Margin

An account used under installment and cost-recovery methods to defer profit on credit sales until cash is collected, calculated as $\text{Selling Price} - \text{COGS}$.

Gross Margin Percentage

The proportion of profit generated from sales, calculated using the formula $(\text{Revenue} - \text{COGS}) / \text{Revenue}$.

Accounts Receivable, Gross

An asset account representing the total amounts due from customers who purchased goods or services on credit.

Bad Debt Expense

The operating expense associated with an uncollectible account when a credit customer fails to pay.

Allowance for Uncollectibles

A contra-asset account with a normal credit balance used to offset gross receivables to reflect estimated uncollectible accounts.

Net Accounts Receivable

The net collectible balance of receivables reported on the balance sheet, calculated as $\text{Gross A/R} - \text{Allowance for Uncollectibles}$.

Percentage-of-Sales Procedure

An approach that estimates current-period bad debt expense directly as an established percentage of credit sales.

Aging-of-Accounts-Receivable Procedure

A method that groups open receivables by how overdue they are to determine the required ending balance in the allowance account, where the periodic adjustment equals $\text{Desired Ending Allowance} - \text{Existing Allowance Balance}$.

Sales Returns

A contra-revenue account with a debit balance that directly reduces net sales and income on the income statement.

Allowance for Sales Returns

A contra-asset account against gross accounts receivable that estimates credit receivables expected to be cancelled due to future customer returns.