From the course: Running a Profitable Business: Revenue Recognition
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Recognizing revenue
From the course: Running a Profitable Business: Revenue Recognition
Recognizing revenue
- Let's do a simple numerical example of recognizing revenue in multiple element transaction. Assume that on January 1 of year one, Sophie Company, a technology services company, signs a contract with a customer for $480,000. Sophie Company collects the entire $480,000 in cash immediately upon signing of the contract on January 1 of year one. Sophie Company promises to provide the customer with hardware, software, installation, and off-site data backup for two years starting when installation is complete. Now, possible approaches that Sophie Company might follow in recognizing this $480,000 in revenue are as follows: First, she could recognize the entire $480,000 as revenue on January 1 of year one, and you might be tempted to choose this approach because you are fixated on the collection of cash. She collects the cash upfront. But remember that the objective of a cool accounting in general and revenue recognition in particular is to create a measure of the value of economic activity…
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