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Recognition of Revenue


24 Minute Accounting

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Unit Video

Unit Summary

The four types of transactions where Recognition of revenue takes place are:
  • Sale of Inventory
  • Services Rendered
  • Use of Company Assets
  • Sale of Other Assets

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Hi, in this video you will learn how to record (or recognize) revenue in your accounts.
Depending on the type of business that you are operating, there is a different method available to you to use in recognizing revenue.
Remember, as per accrual accounting, revenue is only recognized once it has been earned. We do not want to manipulate our records to show a ‘Rosier picture today only to be proven wrong in the future.
There are four (4) types of transactions where Recognition of revenue takes place:
  1. Sale of Inventory – Once inventory has been shipped to / or delivered to your clients, then you can recognize this as the date of sale and invoice your client accordingly.
  1. Services Rendered – Revenues from rendering services are recognized when services are completed and billed. Depending on the agreement with your client, you may be able to partially invoice them at different stages of the contract / project, whereby you only invoice for the work completed.
  1. Use of Company Assets – 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
  1. Sale of Other Assets – Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place. For example, if machinery is sold, the funds received (Cash or other assets) are recorded as revenue earned.
It is the responsibility of the CFO and / or the Chief Accountant to spell out when the organization needs to invoice their clients.
It is easy to manipulate sales figures in a bad or mediocre year. In accordance with accounting rules and regulations, revenue can only be recognized once it is earned. Don’t be caught out as going against the grain, as you never know when you will be audited.

In line with this trend, revenue recognition on a number of larger banking projects will occur later than anticipated. Kevin Ashton