How to Calculate Revenue Recognition

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Revenue is not recognized after a sale agreement, even if a contract is signed.
Revenue is not recognized after a sale agreement, even if a contract is signed. (Image: Jupiterimages/BananaStock/Getty Images)

When a company prepares its yearly financial statements, it must determine its total annual revenues. Revenue is the total amount charged by a company for goods and services sold. Before a sale is considered revenue, it must meet revenue recognition criteria. Revenue recognition is an accounting principal that determines when a company's income can be recorded as revenue. The two main types of revenue recognition are point of sale and cash basis.

Point of Sale Method

Make the sale to your client. Revenue is not recognized immediately after the sale even if a sales agreement is signed.

Transfer the goods and services to your client. Revenue is recognized immediately after you transfer ownership of the goods to the client or have performed the required service. Revenue is recognized regardless of whether you have been paid yet. The full sale price is recognized as revenue.

If the customer pays you at the time of delivery, record the amount in your cash account. If the customer does not pay you at the time of delivery, record the amount due in your accounts receivable.

Cash Basis Method

Make the sale to your client. No revenue is recognized at this time even if a sales agreement is signed.

Transfer the goods and services to the client. Revenue is recognized at this point only if the client pays you. Revenue is not recognized after sales if payment is not received, according to the cash basis method.

If cash is collected at the point of sale, count the payment as revenue and record the payment amount in your cash account.

If cash was not collected at the point of sale, do nothing and wait until payment. Once the cash for the sale is received, count the payment as revenue and record the payment amount in your cash account.

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