Question

Below are the events related to ABC Company: May 1: A customer of ABC Company inquired...

Below are the events related to ABC Company: May 1: A customer of ABC Company inquired about the availability and price of a service. May 5: ABC agreed to its customer’s terms and conditions regarding consultancy services to be provided in the future. May 28: ABC performed consultancy services to its customer and prepared the invoice. June 7: The customer made a cash payment for the invoice issued on May 28. Assuming ABC Company uses accrual basis accounting, when should it recognize revenue? Discuss briefly.

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Answer #1

Revenue from rendering services are recognised when services are completed and billed.

In order to recognise revenue, 5 conditions needs to be satisfied.

1. Risks and rewards are transferred from seller to buyer.

2. The seller has no control over the goods.

3. Collection of payment is reasonably assured.

4. Amount of revenue can be measured reasonably.

5. Cost of earning the revnue can also be measured reasonably.

Therefore by applying the above criteria for revenue recognition ABC Company should recognise the revenue on completion and billing of the service, ie, May-28th.

Receipt of cash from customer is not considered for Revenue Recognition therefore to be ignored in this case.

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