Revenue Recognition Essay Example for Free

Revenue Recognition EssayCompanies that produce to order under work or construction contracts often attempt to spread prospective taxs, related costs, and resulting net income over the liveliness of the contract in proportion to the work accomplished. The method used to accomplish this spreading of revenues, costs, and income is called the percentage of- shutting or production method. Sales Basis. The sales (or accrual) prat is the most widely used method for recognizing revenues. Revenues argon assumed to be earned at the time the sale is made, even though the bills whitethorn not have been collected from customers. For companies that produce to open stock, the sale is the critical event for revenue recognition. tear down though value is added to goods through the production process, these companies face considerable uncertainty about who the customer get out be and about the amount and timing of the sale. It is necessary to have an arms length transaction, in which the customer is legally obligated to pay for the merchandise or service. Such factors as the signing of a sales contract and the delivery of the product provide evidence that the sale has been made.At the time of the sale, revenue is recognized and the amount due from the customer is reflected as an asset such as accounts receivable. Cash expediency Basis. In some cases, the receipt of cash is considered to be the critical event for revenue recognition. There ar three reasons for using the cash receipts basis. First, for some taxpayers, the use of the cash receipt basis is deductible for computing taxable income and may result in some postponement of tax payments. Second, when collection from customers is regarded as very uncertain, the cash receipts basis may be the best indication of actual revenues.Finally, the cash receipts basis is more conservative than the sales basis. It is important to realize that when the cash receipts basis of revenue recognition is used, the product mus t also have been delivered to customers before revenue is recognized. Thus, if cash is current in advance (such as with magazine subscriptions), the receipt of cash would not be considered sufficient evidence for recognizing revenue. Reference link http//classof1. com/homework-help/finance-homework-help