What is Revenue Recognition?

Revenue recognition is a concept to determine

when a business has actually earned its revenue. If you own a business or deal in the accounting process then you should know

what is revenue recognition principle?

To understand the revenue recognition principles you should first understand the concept.

As the name suggests revenue recognition is an accounting principle that highlights the condition through which the revenue of a company can be recognized. The thumb rule of revenue recognition is when you make an invoice for any business transaction, the amount of that invoice transaction should be recorded as revenue at that point only

according to GAAP (Generally Accepted Accounting Principle). 

ASC is a new revenue recognition standard. ASC has a great impact on both public and private sector companies. ASC 606 is used by the companies as a tool such as how the company will grow forward as revenue is the heartbeat of any business

There are 5 key 606 principles that every business should apply for revenue recognition.

1. Associate the contract with a customer.

2. Identify the contract obligation & performance

3. Record the transaction price

4. Issue the price invoice

5. Acknowledge the

   revenue as the entity satisfies a performance obligation.

In real estate, the cost of revenue recognition can be calculated by multiplying the sale value with the total contract value. To recognize revenue in real estate you can use the POC method under AS 7. Let us understand the method how to calculate the revenue in real estate explained below:

• This method is used to determine the stage of competition of the project.

• Aggregate revenue of cost involved and profit recognized.

• To determine the real estate revenue recognition you will need to calculate the Total Saleable Area sq ft, Land cost, Estimated construction, and development cost of Total area sold Total sale agreement value.

Hope you found this answer useful and got an idea of what is revenue recognition principle.

Revenue recognition concept, as the name suggests is a concept where the treatment and accounting of revenue generated from certain transactions is determined. The revenue is recognized when an entity or an individual provides goods or services promised either over time or at a point in time.

According to GAAP (Generally Accepted Accounting Principle) it is required that the revenue is recognized and accounted for on the income statement in the period when realized not earned, irrespective of receiving cash for the transaction.

The revenue recognition takes place when following conditions are met in case of sale of a good:

1. Transferring significant risks and rewards through ownership
2. There are probable economic benefits in the future
3. When the goods are a reliable measurement of value
4. When you can get reliable measurement of cost
5. When you don’t have managerial involvement or effective control on the goods

The revenue recognition takes place when following conditions are met in the case of rendering services. When the event is categorized as Outcome estimated reliably, the revenue recognition takes place by referring to the stage of completion. When the event occurs under the category of Outcome not estimated reliably, the revenue recognition takes place only to the extent of expenses that are recoverable. Here are a few conditions for the first event mentioned above for revenue recognition are:

1. Reliable measurement of revenue
2. Probable future economic benefits
3. Reliable measurement of stage of completion
4. Reliable measurement of completion cost

The revenue recognition in the real estate industry is determined once the builder completes the project and delivers it to the buyers.

The 3 step model of revenue recognition is as follows:

• Identify the contract with the customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations
• Recognize revenue when (or as) the entity satisfies its performance obligations

This should give you an idea about what is revenue recognition concept and everything around it.