When to recognize revenue

You should consider the following two factors when determining the proper date and amount of revenue to recognize:

  • Is the sale realized or realizable? A sale is realized when goods or services are exchanged for cash or claims to cash. You generally cannot recognize revenue until a sale is realized or realizable.
  • Has the sale been earned? A sale has been earned when an entity has substantially accomplished whatever is needed in order to be entitled to the benefits represented by the revenue.

More specifically, an entity can record revenue when it meets all of the following criteria:

  • The price is substantially fixed at the sale date.
  • The buyer has either paid the seller or is obligated to make such payment. The payment is not contingent upon the buyer reselling the product.
  • The buyer’s obligation to pay does not change if the product is destroyed or damaged.
  • The buyer has economic substance apart from the seller.
  • The seller does not have any significant additional performance obligations related to the sale.
  • The seller can reasonably estimate the amount of future returns.

Related Courses

Bookkeeping Guidebook 
How to Audit Revenue 
Revenue Recognition