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Revenue and Expense Recognition

Revenue and Expense Recognition. Chapter 7. Issue: Revenue & Expense Recognition. Accrual vs. Cash. Accrual vs. Cash. What ’ s Revenue & Expenses?. Accrual vs. Cash. Accrual Basis: Revenue & Expenses. ‘98 FYE. ‘00 FYE. July 1/98. June 30/99. Fiscal Period. Cash Basis.

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Revenue and Expense Recognition

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  1. Revenue and Expense Recognition Chapter 7

  2. Issue: Revenue & Expense Recognition Accrual vs. Cash

  3. Accrual vs. Cash What’s Revenue & Expenses?

  4. Accrual vs. Cash Accrual Basis: Revenue & Expenses ‘98 FYE ‘00 FYE July 1/98 June 30/99 Fiscal Period Cash Basis Cash Receipts Revenue Expenses Cash Disbursements

  5. Accrual vs. Cash Accrual recognizes resource flows prior to cash flows

  6. Accrual vs. Cash: Example A) Insurance premium paid in ‘99 Dejevu Ltd comparative B/S for ‘98 & ‘99 reported the following selected amounts Prepaid Ins Ins Exp 1400 1500 1500 X ‘99 ‘98 1000 1400 + X- 1500 = 1000 Prepaid Insurance $1000 $1400 X = 1100 B) Rent rev collected in cash in ‘99 $1800 $1000 Unearned Rent Rev Unearned Rent Rent Rev Dejevu’s ‘99 I/S reported the following: 14400 14400 1000 X 1000 + X - 1800 = 14400 Rent Rev $14,400 1800 X = 15,200 Insurance Expense $1,500

  7. Revenue Recognition Issue: When? Matching expenses

  8. Revenue Recognition: Criteria • All or substantially all of goods or services have been provided • Most costs incurred or can accurately measured • Revenue is measurable in $ • Asset received can be measured

  9. Revenue Recognition 4 Common Methods Point of Sale Goods or services delivered & legal title has passed between vendor & purchaser.

  10. Revenue Recognition 4 Common Methods % of completion Estimate % of project completed during period and recognize proportion of total expected revenue and costs

  11. Revenue Recognition 4 Common Methods Completion of Production No customer but project is now complete - is this a reasonable means to recognize revenue? Only when guaranteed market, stable prices, minimal marketing costs.

  12. Revenue Recognition 4 Common Methods Cash received! Appropriate when serious doubt about the collectibility of cash.

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