Recognizing revenue is an important part in accounting. The
revenue gets recognized once the company provides the service for their
customer. There are five main steps in recognized revenue and each step plays a
vital role in the process.
The first
step in recognizing revenue is identifying the contract. The contract is the
agreement between the two parties. Contracts can don’t have to be written down,
they can be verbal as well. Some contracts even have termination rights which
means at any time one of the parties is able to get rid of the contract. With those right, those contracts are not forceful or an official contract. Parties are able to combine contracts or even
just have one party have obligations. The second step is figuring out the
performance obligations. This step is to discuss how to full fill what was
stated in the contract.
The third
step in recognizing revenue is determining the transaction price. Revenue can be
given in different ways. Two ways it can be given is through money and through
an issued note. When a note is issued it is either recognized by its present
value or back to todays dollar. There are also three ways to approach and solve
this step which is by doing the expected value approach or the most likely approach.
The fourth step is breaking up each of the performance obligations. The
three methods for fair value when doing this is looking at the cost,
identifying what the market is willing to pay for it, or its residual which
means what’s left over. The last step is recognizing the revenue when it is
provided or performed. The last step is simple because this is when you record it on the books.
The
importance of being aware and understanding recognizes revenue is vital for
every company. Every company needs to follow these steps in order to record correctly and according to the rules that FASB has in placed. These five steps are vital in recording revenue.
