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Is The Point Of Sale Unduly Conservative Basis For The Timing Of Revenue Recognition?

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The point of sale is the most widely used basis for the timing of revenue recognition because in most cases it provides the degree of objective evidence accountants consider necessary to measure periodic business income reliably. In other words, sales transactions with outsiders represent the point in the revenue generating process when most of the uncertainty about the outcome of business activity has been alleviated. It is also at the point of sale in most cases that substantially all of the costs of generating revenues are known, and they can at this point be matched with the revenues generated to produce a reliable statement of a firm's effort and accomplishment for the period. Any attempt to measure business income before the point of …show more content…

Before the purchase the amount of revenue anticipated from the methods of production is merely prospective revenue; its realization remains to be validated by actual sales. The accumulation of costs during manufacture does not alone generate revenue; instead, the entire process, including making deals, earns revenues. Thus, as a general rule, the sale cannot be regarded as being an unduly conservative basis for the timing of revenue recognition. Except in unusual circumstances, revenue recognition before purchase would be anticipatory in nature and unverifiable in amount. ii. To criticize the sales basis as not being sufficiently conservative because accounts receivable do not represent disposable funds, it is necessary to assume that the collection of receivables is the decisive step in the earning process and that periodic review measurement, and therefore net income, should depend on the amount of cash generated during the period. This assumption disregards the fact that the sale usually represents the decisive factor in the earning process and substitutes for it the administrative function of managing and collecting receivables. In other words, the investment of funds in receivables should be regarded as a policy designed to increase total revenues, adequately recognized at the point of sale; and the cost of managing receivables (e.g., bad debts and collection costs) …show more content…

When cash is received. The most common application of this basis for the timing of revenue recognition is in connection with installment sales contracts. Its use is justified because, due to the length of the collection period, increased warrant revenue recognition until cash is received. The mere fact that sales are made on an installment contract basis does not justify using the cash receipts basis of revenue recognition. The justification for this departure from the sales depends essentially upon an absence of a reasonably objective basis for estimating the number of collection costs and bad debts that will be incurred in late periods. If these expenses can be expected with reasonable accuracy, the sales basis should be used. 5-8 If two estimates of an amount that is to be received or paid in the future are about equally likely, the concept of conservatism dictates using the less optimistic

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