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Revenue Recognition Essay

2964 words - 12 pages

Whenever a product is sold, the seller earns and reports the revenue. However, in the real world such sales transactions are not as straight forward, and the principle of revenue recognition is one that creates the most issues for accountants. Now a days the process of selling has become quite complex. There are many issues and procedures involved. Customers have the option to make payments right away when making the sale, or can choose to make the payment in installments as agreed to in the sales contract. There are many credit and financing options available. Customers also have guaranteed return days. All of these incentives help make it easier for customers to buy products increasing sales for the seller; however, the job of an accountant has become more challenging. Accountants have yet to come up with a system that perfectly suites revenue recognition, and is compatible with all the various industries.
“The President and CEO of FEI, Colleen Cunningham, ranks revenue recognition in the top 3 financial reporting issues faced by accountants today. In 2006, a survey was conducted in the Financial Accounting Standards Advisory Council and the FASB. Majority of the members in both organizations felt that finding the solutions to the issues regarding revenue recognition should be FASB’s top priority. (Graziano 2005).” In this paper some of the challenges and issues concerning revenue recognition and the procedures set in place by various accounting organizations, including FASB will be discussed.
Accountants have long debated when a sales transaction should be recorded as earned revenue. The general rule states that revenue must be recognized when earned or realized, and should be matched to the liability that was faced in earning the revenue in the period. This is known as the matching principle. However the question that many CPAs ask is: when is it really earned? Is it earned when the sale contract is signed, the product is delivered to the customer or the payment of the product is received? Ronald Clark draws the following scenario to help illustrate this revenue recognition issue:
"Capitol Motors is in its first year of operations and as of December 30 has total revenues of $5 million, projected net income of $200,000, and total assets of $40 million (Capitol’s year-end is December 31). On December 31, a customer and Capitol Motors agree to terms on the purchase of a new automobile for $25,000. The customer signs and completes all paperwork for the sale but asks Capitol to hold the full-payment check until he can complete...

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