CPA Financial Accounting and Reporting (FAR)

Certified Public Accountant Financial Accounting and Reporting examination.

Conceptual Framework and Standard SettingFinancial Statements and DisclosuresRevenue Recognition
LeasesFinancial Instruments and Fair Value MeasurementBusiness Combinations and Consolidations
Analyzing Real-World Financial StatementsPreparing Adjusting and Closing EntriesApplying GAAP to New Business Transactions
Mastering Multiple-Choice QuestionsSimulations and Task-Based Testlets
Conceptual Framework...Financial Statements...Revenue RecognitionLeasesFinancial Instrument...Business Combination...Analyzing Real-World...Preparing Adjusting ...Applying GAAP to New...Mastering Multiple-C...Simulations and Task...
Basic Concepts

Revenue Recognition

When Is Revenue Really Earned?

Revenue recognition is all about when to record sales and income in the books. It’s not as simple as just counting cash received! Accountants follow the five-step model from ASC 606 to decide when revenue should be recognized.

The Five-Step Model

  1. Identify the contract with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations.
  5. Recognize revenue when (or as) the performance obligations are satisfied.

Why It Matters

Correctly recognizing revenue ensures that financial statements are accurate and not misleading. It prevents companies from inflating their results by recording sales too early.

Real-World Scenario

If a company delivers a product in January but gets paid in February, revenue is recognized when the product is delivered—not when cash is received.

Examples

  • A software company recognizes revenue over the contract period as it provides ongoing support to its customers.

  • A retailer records revenue when the customer takes home a purchased item, not when the cash is deposited.

In a Nutshell

Revenue is recorded when goods or services are delivered, following a clear five-step process.

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Leases
Revenue Recognition - CPA Financial Accounting and Reporting (FAR) Content | Practice Hub