What Are the Cons of Revenue Recognition at the Point of Sale?

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Accounting is done on either an accrual or a cash basis. In accrual basis accounting, revenue is recognized at the point of sale, meaning that revenue is recorded on the business's accounts the moment that a sale is made and the benefits of ownership transferred to the customer. Revenue recognition at point of sale is disadvantageous to the business only in that its figures are not set in stone and can change because of subsequent occurrences.

Revenue Recognition

  • Recognition of revenue means to record that revenue's existence on a business's accounts for the time period in question. Determining when to recognize revenues on a business's accounts is an important issue in accounting since the timing can produce enormous changes in a business's periodic financial statements that produce distortions of their true circumstances.

Accrual and Cash Bases

  • Almost all accounting is done on either an accrual or a cash basis. Accrual basis requires that costs and revenues be recorded at time of their occurrence, whereas cash basis requires that costs and revenues be recorded at the time that cash is either paid out or received for them. In comparison, accrual basis produces financial statements that represent a business's true circumstances more accurately but are also less certain than those produced by cash basis. Subsequent events can and do change figures used and produced by accrual basis accounting.

Revenue Recognition at Point of Sale

  • Revenue is recognized under accrual basis accounting whenever it meets two criteria. One is that the revenues must be earned, meaning that the transaction to earn the revenue has been performed. Two is that the revenues must be realizable, meaning that the revenue must have a reasonable chance of being collectible. Almost all transactions meet both criteria at the point of sale where the transaction is completed and the rights of ownership have transferred to the customer.

Disadvantages of Revenue Recognition at Point of Sale

  • Since revenue recognition at point of sale is required under accrual basis accounting and almost all transactions barring rare exceptions, such as buybacks, the drawbacks to revenue recognition at point of sale are identical to those of accrual basis accounting in comparison to cash basis accounting. Accrual basis accounting is disadvantaged in that it requires more work to estimate some of the figures needed and that these estimates admit a degree of inaccuracy into the figures.

References

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