Revenue recognition is the process of recording and reporting revenue earned by a company in its financial statements.
The method of recognizing revenue can have a significant impact on a company’s financial performance and profitability!
There are several techniques that can be used to recognize revenue, including…
✦ Cash Basis Accounting
✦ Accrual Basis Accounting
✦ Percentage of Completion Method
✦ Completed Contract Method
✦ Installment Sales Method
✦ Cost Recovery Method
Let's see each of them...
✦ Cash Basis Accounting
This optional accounting method recognizes revenue when cash is received.
This technique is relatively simple, but it can lead to inaccurate financial statements, as revenue and expenses may not be recognized in the period in which they were earned or incurred.
✦ Accrual Basis Accounting
This other method recognizes revenue when it is earned, regardless of when payment is received. This technique provides a more accurate picture of a company’s financial performance, but it can be more complex than cash basis accounting.
✦ Percentage of Completion Method
This alternative method is used when a company is engaged in long–term projects,
such as construction projects. Revenue is recognized based on the percentage of completion of the project, rather than on the completion of the project as a whole.
✦ Completed Contract Method
With this method revenue is recognized only when the project is complete. This technique is typically used when it is difficult to estimate the total costs of a project.
✦ Installment Sales Method
This method is used when a company sells a product or service and allows the customer to pay for it over time. Revenue is generally recognized as payments are received from the customer.
✦ Cost Recovery Method
This other method is used when a company is uncertain about the collectability of a sale. Revenue is recognized only when the cost of the product or service has been recovered through cash payments from the customer.
GO TO THIS LINK and check out our Advanced Guide in reading Profit and Loss to get deeper knowledge about each component of the Income Statement!
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