Question:
Revenue earned by a business enterprise is recognized for accounting purposes at different times,
according to the circumstances. In some situations revenue is recognized approximately as it is earned in
the economic sense. In other situations revenue is recognized at point of delivery.
Required:
1. Explain and justify why revenue often is recognized as earned at point of delivery.
2. Explain in what situations it would be useful to recognize revenue as the productive activity takes
place.
3. At what times, other than those included in (1) and (2) above, may it be appropriate to recognize
revenue?
Answer:
Requirement 1
While revenue often is earned during a period of time, revenue usually is recognized at a point in time
when both revenue recognition criteria are satisfied. These criteria usually are satisfied at the point of
delivery. The revenue has been earned and there is reasonable certainty as to the collectibility of the asset
(cash) to be received.
Usually, significant uncertainties exist at the time products are produced. At the point of delivery, the
product has been sold and the price and buyer are known. The only remaining uncertainty involves the
ultimate cash collection, which can usually be accounted for by estimating and recording allowances for
possible return of the product and for uncollectibility of the cash.
Requirement 2
It would be useful to recognize revenue as the productive activity takes place when the earnings process
occurs over long periods of time. A good example is long-term projects in the construction industry.
Revenue earned by a business enterprise is recognized for accounting purposes at different times,
according to the circumstances. In some situations revenue is recognized approximately as it is earned in
the economic sense. In other situations revenue is recognized at point of delivery.
Required:
1. Explain and justify why revenue often is recognized as earned at point of delivery.
2. Explain in what situations it would be useful to recognize revenue as the productive activity takes
place.
3. At what times, other than those included in (1) and (2) above, may it be appropriate to recognize
revenue?
Answer:
Requirement 1
While revenue often is earned during a period of time, revenue usually is recognized at a point in time
when both revenue recognition criteria are satisfied. These criteria usually are satisfied at the point of
delivery. The revenue has been earned and there is reasonable certainty as to the collectibility of the asset
(cash) to be received.
Usually, significant uncertainties exist at the time products are produced. At the point of delivery, the
product has been sold and the price and buyer are known. The only remaining uncertainty involves the
ultimate cash collection, which can usually be accounted for by estimating and recording allowances for
possible return of the product and for uncollectibility of the cash.
Requirement 2
It would be useful to recognize revenue as the productive activity takes place when the earnings process
occurs over long periods of time. A good example is long-term projects in the construction industry.
