One of the most important decisions in accounting is to know when to recognize revenue. Understanding the revenue recognition criteria and how they apply helps you understand when revenue should be earned.
Think about the business in which you work. How would revenue be recognized in your industry? In what type of industries would a company have to wait to report revenue even though the payment or valid promise of payment might be received early?
Consider the following examples:
- A long-term construction company (such as one that builds highways)
- A fitness center where membership dues are paid upfront and quarterly
Select one example and respond to the following in a minimum of 175 words:
- When do you think revenue would be recognized?
- When would the two revenue recognition criteria be met?
- What is the risk to users of financial statements if revenue is recognized too early?
Discuss the difference between overstatement and understatement of revenues.