Revenue Recognition - Revenue Recognition Understanding...

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Revenue Recognition Understanding Sales Transactions Accounting for revenues is often very complex Much of complexity is caused by the structure of the sales transactions To properly account for sales transactions, accountants must understand the business of the entity and the nature of the transaction Key questions for understanding the sales transactions from a business perspective are: What is being given up? What is being received? Normally specified in sales agreements What is being sold? Sales transactions often involve transfer of goods, services, or both (known as deliverables) Accounting is different under each situation Sale of goods: physical assets with finite point when control transfers to buyer (generally with transfer of legal title and possession) Sale of services: legal title and possession irrelevant Sale of goods and/or services combinations: complexity in measuring each component of bundled sales or multiple deliverables Concessionary Terms It is critical to understand if sales are done under normal terms, or are special/unusual and
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Unformatted text preview: contain concessionary terms such as: – Lenient return/payment policy – More accommodating credit policy – “Bill and hold” transactions – Inclusion of “extras” • Concessionary terms may create additional obligations, or may indicate that control has not passed to the buyer Legalities • Rights and obligations of sales transactions are described and governed by law • Contract law is most relevant as each sales transaction represents a contract with the customer • Contract creates enforceable obligations and establishes the terms of the deal • Sales contract generally determines the point when legal title and possession of goods sold pass on to the customer: – FOB shipping point – FOB destination • Implicit obligations not specifically outlined in the sales contract (i.e. constructive obligation) may also be enforced under common or other law...
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  • Fall '12
  • kwok
  • legal title, sales transactions, concessionary terms

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