From the course: Running a Profitable Business: Revenue Recognition
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At the same time as cash collection
From the course: Running a Profitable Business: Revenue Recognition
At the same time as cash collection
- Here are the two traditional revenue recognition criteria that must both 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 before the cash is collected? Well yes, if the buyer has provided a valid promise to pay. This is just an ordinary credit sale. The customer buys now and pays later. So let's talk about credit sales for just a moment. Selling on credit is a marketing technique; providing a service to customers to entice more customers to buy. Companies sell on credit to the extent that the increase in sales justifies the increased bookkeeping, bad debt, and carrying costs associated with credit sales. Here's an example, almost all of Boeing's sales are credit sales. Almost all of McDonald's sales are cash sales. But why does Boeing sell on credit, and why doesn't McDonald's sell on credit? Now remember for the seller a credit card…
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