Electric utility bills.
When an electric utility customer uses electricity, the
electric company has earned revenues. It is obviously impossible, however, for
the company to read all of its customers' meters on the evening of December
31. How does the electric company know its revenue for a given year?
According to historical data, the electricity usage usually tended to be fairly
constant from month to month. The company can estimate the revenues for
each month, by using historical data. Generally high fluctuation will not occur
in electricity usage. We can easily estimate the monthly usage by the data of
the same month last year. In this situation, if there is any inaccuracy we can
adjust its estimation.
Usually, the electricity usage is quite constant over time. Therefore, the
company can estimate its revenues based on the data from the last year. If
there is any inaccuracy, we can make adjustment in the following month.
A law firm received a “retainer” of $10,000 on July 1, 2006,
from a client.
In return, it agreed to furnish general legal advice upon request
for one year. In addition, the client would be billed for regular legal services
such as representation in litigation.
There was no way of knowing how often,
or when, the client would request advice, and it was quite possible that no such
advice would be requested. How much of the $10,000 should be counted as
revenue in 2006?
Only half of the “retainer” should be recognized. This is because, according to
the Revenue Recognition Principle, we recognize the revenue when the
service is rendered. At the end of the year, only six months of the services
have been provided.
Even when the client would request advice in a particular
month, we still recognize the revenue because our service has always been
ready due to our responsibility. In other words, we have been provided the
service throughout the year constantly.
Half of the “retainer” which is $5,000 should be counted as revenue in 2006,
the rest $50,00 should be recorded as unearned revenue. We consider
“retainer” as a 1 year service contract no matter when the customer will
request advice. Actually, we are always stand by for any request from the
customer, which mean we are providing service throughout the year
constantly. Once you may argue that there may not be any service provided
during the rest year. Like the unearned revenue of rent, once they paid an
unearned revenue will be recorded, and during the rest period, revenue will be
record according to time, no matter the customer “use” the room or not. For
example, in the next month, there will be a decreasing of $1/12X10,000 in
unearned revenue and the same amount of increasing in revenue.
Contract based on period. Standing-by service: how to recognize?