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.