Revenue Recognition: Point of Sale

Definition

The term revenue recognition at the point of sale refers to the process of recording revenue from manufacturing and selling activities at the time of sale.  The revenue recognition principle states a company can record revenue when two conditions are met.  They must be realized or realizable, and earned.  These requirements are typically met when a product is delivered or a service is rendered to a customer.

Explanation

The FASB Concept Statement No. 5 states that companies cannot recognize revenues as being earned until two conditions are met.  They must be realized or realizable, which means the goods or services have been exchanged for cash or claims of cash (credit), or realizable if the transaction involves an asset that can be converted to a known amount of cash.  They must also be earned, which means 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.  Most retail companies recognize revenue at the point of sale, since the transaction typically involves the immediate exchange of cash or credit for goods or services, as well as the immediate delivery of the goods or services.

When recognizing revenue at the point of delivery, companies need to consider two additional factors:

  • Credit Sales:  when a sale is made on credit, the company creates an accounts receivable.  Unfortunately, not all receivables are eventually collected, and the company's revenue may need to be adjusted for doubtful accounts.
  • Sales with Returns: when a company sells a product that a customer can return, FASB guidelines state that six requirements must be met before the company can recognize this revenue:
    • The price is known and fixed on the date of sale.
    • The buyer has paid the seller, and the sale is not contingent on the resale of the item.
    • If the merchandise is physically damaged or stolen, the obligation of the buyer to pay the seller does not change.
    • If the buyer is purchasing the product for resale, subsequent transactions involving the resale of the item cannot affect the seller.
    • The seller does not have an obligation to the buyer for the performance of the merchandise.
    • Future returns of a product are reasonably estimable.

Related Terms

revenues, revenue recognition principle, revenue recognition: before delivery, accounts receivable, allowance for doubtful accountsrevenue recognition: during production, percentage-of-completion method, completed-contract methodrevenue recognition: after delivery, installment method, cost recovery method