Revenue Recognition - General Rule

General Rule

Received advances are not recognized as revenues, but as liabilities (deferred income), until the conditions (1.) and (2.) are met.

1. Revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services. Revenues are realizable when assets received in such exchange are readily convertible to cash or claim to cash.
2. Revenues are earned when such goods/services are transferred/rendered. Both such payment assurance and final delivery completion (with a provision for returns, warranty claims, etc.), are required for revenue recognition.

Recognition of revenue from four types of transactions:

1. Revenues from selling inventory are recognized at the date of sale often interpreted as the date of delivery.
2. Revenues from rendering services are recognized when services are completed and billed.
3. Revenue from permission to use company's assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used.
4. Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place.

In practice, this means that revenue is recognized when an invoice has been sent.