Revenue is recorded (booked) “when” it is both earned and realizable. Earned means the delivery process of the good or service is fulfilled by the seller. Realizable means the money is reasonably assured of being collected by the seller.

Recording of revenue is referred to as revenue recognition. It’s pretty straightforward in many cases “when” revenue should be recorded. It is at the point of sale. However, where a business is involved in contract fulfillment, it’s less clear “when” value has changed hands and money has been “earned.” That’s because the contract is often being completed in stages.

General Electric Co. (GE) does significant contract-based work. A fairly recent change in accounting standards for revenue recognition impacts companies like GE. Go here and here to read about GE’s actions to restate prior financials in light of the new accounting requirements.

Key sentences from the Reuters article are as follows: “The new accounting standard governs how companies estimate and recognize revenue from long-term contracts, and is designed to make a company’s cash flow more closely match its income, accounting experts and analysts said. The prior standard allowed companies to recognize future revenue from such agreements more quickly. The new standard shifts revenue to later in the contract duration, analysts said.”

Finally, go here if you’d like to read more about the new revenue recognition protocol.

Till next time and may God bless you.