Revenue Recognition Methods
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Revenue is the largest single number in the financial statements that attracts a great deal of user attention. It is therefore important that it is recognized, measured, and presented rightly, so that the users are given the exact information they require. There are various methods of revenue recognition, but not all of them are appropriate for every business model.
Different Revenue Recognition methods include:
- Sales-basis Method - Revenue is recognized at the time of sale, which is defined as the moment when the title of the goods or services is transferred to the buyer
- Percentage-of-completion method – Popular with construction and engineering companies, who may take years to deliver a product to a customer
- Completed-contract method – Revenues and expenses are recorded only at the end of the contract
- Cost-recoverability method – No profit is recognized until all of the expenses incurred to complete the project have been recouped
- Installment method – When customer collections are unreliable, a company should use the installment method of revenue recognition
- Brokerage Agreement – This method needs to observe certain proprietary rules if the broker intends to work clearly along the guidelines of both the IRS and the SEC
- Accrual method – Prepayments are initially recorded as prepaid assets but are later classified as expense when the goods are delivered or services are performed, and accepted
- Appreciation method – Through this method, there is way for a real estate agent to reduce the gain recognized from selling the property sold at its appreciated value
- Proportional Performance method – Recognizing profits under this method is a modification of the percentage of completion method
- Deposit method - This method is used for monies held as deposits that are subject to cancellation agreement by both parties
- Transactions Under Bill & Hold – This method is the least popular since it has been cited as a method used for several fraudulent transactions, often to bloat a company’s assets
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