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Methods of Revenue Recognition

Methods of Revenue Recognition

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Published by ClassOf1.com
The various Methods of Revenue Recognition discussed in this document are:
1. Accrual method
2. Cash method
3. Installment Sales method
4. Percentage of Completion method
The various Methods of Revenue Recognition discussed in this document are:
1. Accrual method
2. Cash method
3. Installment Sales method
4. Percentage of Completion method

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Published by: ClassOf1.com on Feb 10, 2014
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02/10/2014

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ccounting
 
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Subject: Accounting
 
Methods of Revenue Recognition
1.
 
The Accrual Method of Revenue Recognition
The most common revenue recognition system is based on the accrual method. Under this approach, if the revenue recognition rules presented in the last section have been met, then revenue may be recognized in full. In addition, expenses related to that revenue, even if supplier invoices have not yet been received should be recognized and matched against the revenue. The name of this method does not imply that the revenue should be accrued
the name of this approach only applies to the accrual of expenses.
2.
 
The Cash Method of Revenue Recognition
Revenue recognition under the cash method simply means that revenues are recognized at the point when cash is received from a customer that is in payment of a sale to that customer. There is no difference between the accrual and cash methods if sales are over-the-counter, but there can be a significant difference if the majority of sales are billed to customers, for which payment is received at some later date. The cash basis of revenue recognition is not recognized as an acceptable reporting method by GAAP, since it does not match revenues to related expenses.
3.
 
The Installment Sales Method of Revenue Recognition
The installment method is used when there is a long string of expected payments from a customer that are related to a sale, and for which the level of collectability of individual payments cannot be reasonably estimated. This approach is particularly applicable in the case of multi-year payments by a customer. Under this approach, revenue is recognized only in the amount of each cash receipt, and for as long as cash is received. Expenses can be proportionally recognized to match the amount of each cash receipt, creating a small profit or loss at the time of each receipt.
4.
 
Completed Contract Method of Revenue Recognition
In the construction industry, one option for revenue recognition is to wait until a construction project has been completed in all respects before recognizing any related
 
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The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades.
Subject: Accounting
 
revenue. This method makes the most sense when the costs and revenues associated with a project cannot be reasonably tracked, or when there is some uncertainty regarding either the addition of costs to the project or the receipt of payments from the customer.
5.
 
Percentage of Completion Method of Revenue Recognition
This method is most commonly used in the construction industry, where very long-term construction projects would otherwise keep a company from revealing any revenues or expenses on its financial statements until its projects are completed, which might occur only at long intervals. Under this approach, the accountant develops a percentage of project completion based on the total costs incurred as a percentage of the estimated total cost of the project, and multiplies this percentage by the total revenue to be earned under the contract (even if the revenue has not yet been billed to the customer). The resulting amount is recognized as revenue. The gross profit associated with the project is proportionally recognized at the same time that revenue is recognized.
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