Question

Identify the five steps in the revenue recognition process.

Short answer

The revenue recognition process is as follows:

1. Identify the contract with customers.
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance obligations.
5. Recognize revenue when each performance obligation is satisfied.

Step-by-step solution

Meaning of Revenues

The term revenue refers to the accumulated amount of sales recorded by a company in the book of accounts for which the underlying good is transferred, or services are performed.

Identify the Contract with Customers

Acontractis an agreement between two or more parties that creates enforceable rights or obligations. Contracts can be written, oral, or implied from customary business practice revenue is recognized only when a valid contract exists.

Identify the separate performance obligations in the contract

Aperformance obligationpromises to provide a product or service to a customer. This promise may be explicit, implicit, or possibly based on customary business practice. To determine whether a performance obligation exists, the company must provide a distinct product or service to the customer.

Determine the transaction price

Thetransaction price is the amount of consideration that a company expects to receive from a customer in exchange fortransferring goods and services. The transaction price in a contract is often easily determined because the customer agrees to pay a fixed amount to the company over a short period.

Allocate the transaction price to the separate performance obligations

Companies often have to allocate the transaction price to more than one performance obligation in a contract. The best measure of fair value is what the company could sell the good or service for on a standalone basis, referred to as thestandalone selling price.

Recognize revenue when each performance obligation is satisfied

A company satisfies itsperformance obligation when the customer obtains control of the good or service. The concept of change in control is the deciding factor in determining when a performance obligation is satisfied.