Revenue Recognition: After Delivery
The term revenue recognition after delivery refers to the process of recording revenue after a product or service has been delivered to a customer. The revenue recognition principle states a company can record revenue when they are realized or realizable, and earned. Under certain conditions, a company may choose to defer the recognition of revenue until after cash has been received from a customer.
The FASB Concept Statement No. 5 states that companies cannot recognize revenues as being earned until they are realized or realizable, and the company has substantially completed what it needs to do in order to be entitled to payment. Revenue can be recognized at the point of sale, before, and after delivery, or as part of a special sales transaction.
If the sales price is not reasonably assured after delivery of the product or service to a customer, the company may choose to defer recognizing revenue until cash is received. Generally, there are two accepted methods to account for these transactions:
- Installment Method: this approach emphasizes the collection of money rather than the booking of sales revenue. Revenue is recognized as it is collected from customers, not during the accounting period in which the sale occurred.
- Cost Recovery Method: as is the case with the installment method, with this approach total revenue and the cost of goods sold are reported in the period of sale. However, while the installment method recognizes income as cash is collected from customers, the cost recovery method delays recognizing profit until the cash received is in excess of the cost of goods sold.