The Revenue Cycle

The Revenue Cycle

The revenue cycle begins when an order is
received from a customer and ends when
the seller receives payment in full from the
customer.
Steps in the Revenue Cycle
• Receipt of the order
• Determination of the price and sale terms
• Approval of the order
• Credit authorization if the customer will pay later
• Order entry
• Preparation of a packing list
• Picking and packing of the ordered items
• Shipment of the goods
• Recognition of revenue, issuance and submission to the
customer of an invoice or invoices
• Collection of the payment or payments from the customer
Accounting for Revenue
The core principle in IFRS 15 is that an
entity recognizes revenue when it
transfers promised goods to customers.

The amount of revenue recognized is equal

to the amount of consideration received
for the goods transferred.
Steps in Revenue Recognition
1. Identify the contract with the customer.
2. Identify the performance obligations in the
contract.
3. Determine the transaction price.
4. Allocate the transaction price to the
performance obligations in the contract.
5. Recognize revenue when a performance
obligation is satisfied by transferring a
promised good or service to a customer.
1. Identify the Contract
The receipt of an order begins the revenue
cycle.

Identification of the contract includes

approval of the order and credit
authorization.
Requirements of a Contract
1. Creates enforceable rights and obligations and
2. Meets all of the following criteria:
• The parties have approved the contract.
• The rights of each party regarding the goods to be
transferred can be identified.
• The payment terms for the goods to be
transferred can be identified.
• The contract has commercial substance.
• It is probable the company will be able to collect
the consideration that it will be entitled to receive.
2. Identify Performance Obligations in the
Contract
All promises in the contract, whether
written, oral, or implied are identified, and
the entity determines which of the
promises are performance obligations that
should be accounted for separately.
3. Determine the Transaction
Price
The transaction price is the amount of
consideration that the company expects to
be entitled to receive in exchange for
transferring the promised goods to the
customer.
4. Allocate the Price to the Obligations
Allocation of the transaction price is based
on the fair value of each performance
obligation, usually each obligation’s
standalone selling price.
Revenue Cycle Steps
• Entry of the order into the accounting system can
take place after the contract has been identified, the
performance obligations in the contract have been
identified, the transaction price has been determined,
and the transaction price has been allocated to the
performance obligations in the contract.
• If the ordered items are to be shipped, a packing list
is prepared.
• The ordered items are picked and packed for
shipping, if applicable.
• Shipment of the goods takes place.
5. Recognize Revenue
Revenue is recognized when each
performance obligation has been satisfied.
Recognizing the Receivable
(Contract Asset)
When revenue is recognized, it becomes a
contract asset. Contract assets can be an
unconditional or conditional.
• Unconditional contract assets are
recorded as a receivable.
• Conditional contract assets are recognized
as a contract asset until all of the
obligations are fulfilled, and then it
becomes a receivable.
Completing the Revenue Cycle
The revenue cycle is complete when the
customer makes payment in full of the
consideration due to the seller for the
satisfaction of the performance
obligation.

Collection includes all collection activities

necessary to collect the receivable.