From the course: Running a Profitable Business: Revenue Recognition
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After cash collection
From the course: Running a Profitable Business: Revenue Recognition
After cash collection
- Both of the two traditional revenue recognition criteria must be satisfied before revenue can be recognized. The seller has to do something, the work, and the buyer has to do something, pay, or provide a valid promise to pay. So, is it okay to recognize revenue after the cash has been collected, but before the work has been done? No. No. No! You have to have the work done! Let's consider two examples, airline tickets and gift cards. First, airline tickets. Everyone who flies on an airplane pays in advance. Thus, between the time that you pay United Airlines for your flight, and the time that you actually fly, United cannot recognize the revenue. They haven't done the work yet. They have your cash, but they have not yet done the work. So, United must record an obligation to give you a ride on a plane, for which you have already paid. United calls this liability, this obligation, advance ticket sales. As of the end of 2014, United reported this obligation to be 3.7 billion dollars…
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