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BUS 251Ch 4

Revenue recognition, and the statement of income.

Ten short steps: when revenue is earned, the five-step model, bundles, unearned revenue and the tricky cases, then the multi-step statement of income, comprehensive income and earnings per share. Then practise with worked solutions.

Part 1 · When revenue is earned · Step 1 of 10

Revenue follows the goods, not the cash

Sale on account

A hiking club takes 10 tents today for $4,000 and will pay in 30 days.

Earlier
Today
Later
Cash moves
Cash
Revenue
Revenue
DateAccountDebitCredit
TodayAccounts Receivable4,000
Sales Revenue4,000
Tents sold on account.
A company recognises revenue when (or as) it satisfies a performance obligation, that is, when control of the good or service passes to the customer. The timing of the cash does not decide it: cash can come first, at the same time, or later.
Try it: Pick each event and decide whether revenue is recognised today before you look. The two rows often point to different days.
Event at Summit Gear
Revenue today
$4,000
Cash today
$0
Unearned rev.
no change
The club controls the tents today, so the revenue is earned today. Its promise to pay is an asset: accounts receivable.
Revenue when (or as) control passes to the customer
Control means the customer can use the good or service and get its benefits.
Cash first, work later: Dr Cash, Cr Unearned Revenue
A liability: the company owes the goods or the service.
Work first, cash later: Dr Accounts Receivable, Cr Revenue
An asset: the customer owes the company.
Only the revenue side is shown here
Selling goods also moves their cost (Dr Cost of Goods Sold, Cr Inventory). Chapter 7 covers it in detail.
Practise

Practise like it is the midterm

Answer first, then check. Fresh numbers writes a new question of the same type every time, so you can drill bundles, gift cards, statements and EPS until they are routine.

Score
0 / 0
When to recogniseQuestion 1 of 23
A store's year ends November 30. On November 20 a customer pays $900 for a bike that will be delivered on December 5. When does the store recognise the $900 as revenue?

Midterm coming up and journal entries still feel shaky?

Bring your practice problems. We work through them together until every type feels routine.

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