Learning How To Do Revenue Recognition based on Cash Basis

Posted by : Unknown Tuesday, 25 December 2012

LEARNING HOW TO DO REVENUE RECOGNITION

Based on the lecture of Andre Altmeyer at Groupe ESC Troyess

For most businesses, income is recognized as revenue whenever the company delivers or performs its product or service and receives payment for it. However, there are several situations in which exceptions may apply. For example, if a company's business has a very high rate of product returns, revenue should only be recognized after the return period expires.

Companies can sometimes play around with revenue recognition to make their financial figures look better. For example, if XYZ Corp. wants to hide the fact that it is having a bad year in sales, it may choose to recognize income that has not yet been collected as revenue in order to boost its sales revenue for the year.source

REVENUE RECOGNITION (LO Apply revenue recognition and matching principles / sales of goods)

Problem

In January 2010, Peter Rivers-Moore began a music business.

He prepares monthly financial statements and, of course, uses the accrual basis of accounting.

The following transactions happened during the period January to April 2010.

Jan.	14	Bought music on account for 23 €, with payment to the supplier due in 90 days.
Feb.	3	Performed a job on account for Winston Harris for 38 € collectible in 30 days.
Feb.	3	Used up all the music purchased on January 14th.
Mar.	16	Collected the 38 € receivable from Winston Harris.
Apr.	22	Paid the 23 € owed to the supplier from the January 14th transaction.

Prepare

1. In which month should Peter Rivers-Moore record the cost of the music as an expense?

2. In which month should Peter Rivers-Moore report the 38 € revenue on the Income

Statement?

3. If Peter Rivers- Moore uses the cash basis of accounting instead the accrual basis of accounting, in what month will he report revenue and in what month will he report an expense

Plan

Cash-basis accounting: records only cash transactions.

Execute

1. In which month should Peter Rivers-Moore record the cost of the music as an expense? February

2. In which month should Peter Rivers-Moore report the 38 € revenue on the Income

Statement? February

3. If Peter Rivers- Moore uses the cash basis of accounting instead the accrual basis of accounting, in what month will he report revenue and in what month will he report an expense? March for revenue and April for expense

Answer for Cash Basis Accounting

Cash-basis of accounting