1.
Revenue recognition is an accounting principle that defines the particular conditions where revenue is recognized or accounted for (Spiceland et al. 2007). Revenue is the heart of any business performance. Every business activity hinges on the sale. Therefore, regulators recognize the temptations experienced by organizations to push the limits on revenue, especially when all the money has not been collected after a transaction is done.
In contemporary times, a business can earn revenue from different revenue sources every day, and it is usually referred to as the inflow of settlement or assets of liabilities. Business income results from economic activities where one business entity supplies goods or services to the other entity (Spiceland et al. 2007). Revenue weights the achievement of the general business operating activities in the particular accounting period. The recognition of revenue occurs first when the transactions of an organization's earning process are complete or virtually complete, that is when the supplier is not obliged to undertake significant activities following the sale to collect the revenue. Secondly, it occurs when the collection has happened or is reasonably assured to occur, meaning that the collectability of the sales price is rationally guaranteed or the uncollectible amount can be reasonably estimated.
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Usually, it involves an arms-length exchange transaction with an external party. The existence and transaction terms can be described by operation of law or by a determined trade action or might be established in a contract. Revenues are generally recognized as revenue got from the sale of products, which is the delivery date to consumers; revenue from the service that has been rendered, that is when the services have been performed and can be billed; revenue from allowing other entities to use company assets, as the time passes or as the assets are utilized; and the gains gotten from disposing assets that are not categorized as products at the date of sale (Spiceland et al. 2007).
2.
The principle of revenue recognition, which is a combination of accrual accounting and the matching principle, dictates that revenues are recognized after the completion of a crucial business event and when the anticipated revenue is measurable and earned, not necessarily when received. In the case of Bonanza Trading Stamps Inc., which distributes stamps to customers through retailers, revenue can be recognized on a different basis. First, since they have a no return policy for unused stamps, it can collect revenue from this source unless the stamps are distributed before the close of the financial period (Simon 1957). In addition, revenue can be recognized when the stamps are traded. Besides, the number of stamps collected at the at the distribution stage could be recognized as an advanced, which is also referred to as deferred or unearned revenue, until the stamps are traded for the merchandise premiums at the time that all the revenue, including the revenue relating to the stamps that will never be traded, can be recognized. Finally, some revenue can be acknowledged at the time when the stamps are traded, and the balance can be recognized during the point of trading. This treatment would especially be appropriate for the total stamps that will never be traded. The amendment of such basis can be to recognize the revenue from the stamps that would never be traded on a time passage basis.
Noteworthy, the revenue business activity generating revenue must be primarily or fully completed to include its revenue in the respective accounting year, and there must be a rational certainty that the earned revenue will be received (Spiceland et al. 2007).
References
Simon, S. I. (1957). The Accounting for Trading Stamps. Accounting Review , 398-402.
Spiceland, J. D., Sepe, J. F., Nelson, M. W., & Thomas, W. (2007). Intermediate accounting (Vol. 5). New York, NY: McGraw-Hill/Irwin.
