Question

Explain a principal-agent relationship and its significance to revenue recognition.

Short answer

The principal-agent relationship states that the principal's performance role is to deliver goods or provide services for the customer.

Step-by-step solution

Meaning of Principal-Agent Relationship

A principal-agent relationship is one entity appoints another to operate on its behalf legally. The agent acts on behalf of the principle in a principal-agent relationship and should not have a conflict of interest in carrying out the act.

Principal-agent relationship and its significance

In a principal-agent relationship, the principal's performance responsibility is to supply products or execute services for a client. The agent's performance responsibility is to have the principal arrange to deliver these products or services to a client. In a principal-agent relationship, the amount collected by the agent on behalf of the principal is not considered revenue. The amount of commission received by the agent is its income (usually a percentage of the sales price or total revenue).