What are the five steps for revenue recognition under U.S. GAAP (ASC 606)?
There are 5 key steps or principles that are required for revenue to be recognized:
Step 1: Identify the Contract with a Customer: A contract is a written or spoken agreement, generally concerning the sale of goods, employment terms, tenancy of property, and will be enforceable by law.
Step 2: Identify the Performance Obligations in the Contract: A performance obligation is a promise to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer, to a given customer.
Step 3: Determine the Transaction Price: The transaction price will almost always be defined as the price point in which the buyer of goods or services as agreed to pay in exchange for those goods or services.
Step 4: Allocate the Transaction Price to the Performance Obligation: Once the transaction price has been determined, the referenced price should be allocated to its performance obligation within the terms of the contract. Performance obligations may either be one single performance obligation or multiple performance obligations
Step 5: Revenue Recognition Once Obligation Has Been Performed: Revenue should be recognized once the obligation has been satisfied and the customer has retained possession of the goods or services. These transactions will be referred to as prepaid cash in exchange for the performance of the obligation at a later date. This is a very common theme within accrual accounting and should be recorded by recognizing cash and unearned revenue. Once revenue has been earned, the liability will be reversed, and revenue will be recognized
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