First, it is important to remember that the accrual accounting method aligns with this principle, and it records transactions related to revenue earnings as the performance obligations are met, not when cash is collected. While a detailed look at each of these five requirements is too involved for an introductory course, we can use a simple example to show the five steps. Recognize revenue when each performance obligation is satisfied.Allocate the transaction price to the separate performance obligations. Identify the separate performance obligations in the contract.Identify the contract with the customers.Revenue can be recognized when all of the following criteria have been met: This may not necessarily be when cash is collected, as will be illustrated in a later example. To know exactly when and how much revenue to recognize, companies follow FASB’s five-step revenue recognition process in which revenue is recognized at the fifth step. This performance obligation is the performance of services or the delivery of goods being carried out in return for an amount of consideration (often cash) the company expects to receive from the customer. The main revenue recognition objective is to recognize revenue after the company’s performance obligation. Do you recognize revenue when the sale occurs or when cash payment is received? When do you recognize the expenses associated with the sale? How are these transactions recognized? Accounting Principles and Assumptions Regulating Revenue Recognition Regardless of credit payment method, your company must decide when to recognize revenue. This means that your store is owed money in the future from either the customer or the credit card company, depending on payment method. Many of your customers choose to pay with a credit card or charge the purchase to their in-house credit accounts. You own a small clothing store and offer your customers cash, credit card, or in-house credit payment options.
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