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If Comapny A is a seller and Company B is the buyer... Co. A sells spare...

If Comapny A is a seller and Company B is the buyer... Co. A sells spare parts on just in time inventory basis and company B tells company A an outline of what parts they may need during the year. Co. A buys from vendor - not involving Co. B in purchase but ships to company B, but transfer of ownership doesnt occur until B places a purchase order. How should A recognize revenue???? PLEASE EXPLAIN

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Answer #1

Under U.S. GAAP, FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, indicates that revenue is recognized when it is realized or realizable and earned. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied:

  • There is persuasive evidence of an arrangement.
  • Delivery has occurred (e.g., an exchange has taken place).
  • The sales price is fixed or determinable.
  • Collectibility is reasonably assured.

In this case, only delivery has occured,but collection is still not reasonably assured as ownership has still not been transferred. Therefore, Revenue can be recognized by Company A on raising of an invoice on Company B (assuming it is reasonably assured that collection will definetely take place)

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