Bed Linens Online Sales – When to Recognize Revenue
Consider the case of a company that manufactures and sells bed linens online. In accounting, revenue from these finished goods is said to be realized at the time they are delivered to the customer, not at the time they are manufactured or at the time orders are placed by customers.
Suppose that in 2009, linensandhutch.com comforters were manufactured. In January 2010, a customer placed an order of these goods. The goods were delivered in February 2010. When is revenue realized? The revenue is realized in February.
As you may surmise, in the case of a company that sells services, rather than goods, revenue is recognized at the time the services are furnished or rendered and not at the time it was contracted.
Suppose that in January, Wall Treatments Unlimited contracts to install valance board and curtains to Mrs. Jones windows. The valance board and the curtains were installed in February. Mrs. Jones pays the price in March. In what month would Wall Treatments Unlimited recognize revenue? Wall Treatments Unlimited would recognize revenue in February.
The fact that revenue is recognized at the time it is realized is called the realization concept. This realization concept tells us when to recognize revenue.
Revenue is realized when a sale is consummated through the delivery of goods or services. Because of this, the word “sales” is sometimes used as a synonym for revenue, and sometimes you will see the phrase “sales revenue.”
As in the case of expenses, revenue may be recognized before, during or after the period in which the associated cash receipt falls. To begin with, let us consider a case in which revenue is recognized in the same period as that in which the associated increase of cash occurs.
Using the same example above, in January, Wall Treatments Unlimited installed valance board and curtains at Mrs. Jones house; Mrs. Jones pays $100 cash. In keeping with the dual aspect concept, this transaction will have two effects on the accounts of Wall Treatments Unlimited. It will change both sides of the balance sheet – i.e., the assets and the equities.