Question

Describe the revenue recognition principle.

Short answer

The culmination of the process is the revenue recognition principle, which states that revenue is recognized when the performance obligation is satisfied.

Step-by-step solution

Overview of revenue recognition principle

Recognize revenue when each performance obligation is satisfied.

Example-Assume thatBoeing Corporationsigns a contract to sell aeroplanes toDelta Air Linesto recognize revenue.

Recognize revenue when each performance obligation is satisfied when Boeing recognizes revenue related to the sale of the Airplanes to Delta. At this point, Boeing delivers the aeroplanes to Delta and satisfies its performance obligation.

Explanation of principle

In essence, a change in control from Boeing to Delta occurs. Delta now controls the assets because it has the ability to direct the use of and obtain all the remaining benefits from the aeroplanes substantially. Control also includes

Delta has the ability to prevent other companies from directing the use of or receiving the benefits from the aeroplanes.