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.
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:
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