Accounting Recognition of Sales Revenue Research Proposal

Accounting Recognition of Sales Revenue - Research Proposal Example Generally Accepted Accounting Principal (GAAP) with regard to recognition of revenue is covered by FASB Statement of Financial Accounting Concepts No.5. As per paragraph 83 of said SFAC No.5 , revenue â€Å"recognition involve consideration of two factors, a) being realized and realizable, and b) being earned, with some time one and sometimes the other being the most important consideration†. Both criteria are required to be accomplished before the revenue is recognized. The revenue is treated as realized when cash is received for sale of product; and revenue is termed as realizable when a promise to pay is received and that may be either verbal promise to pay or written in the shape of notes receivable. The second condition is that the revenue must be earned. Revenue is treated as earned when enforceable exchange takes place of considerations. That is to say deliveries of goods have been given and promise to pay has been received. Take the case of credit sales where goods have delivered at the time transaction was entered into. In such a transaction a verbal promise to pay has been created on acceptance of delivery by buyer. Accordingly it can be said that revenue has been earned at the time of occurrence of a verbal promise to pay. Again as per SFAC No.5 before recognition of a transaction four basic criteria namely, the arising of basic element of asset or liability or change in equity through such transaction, measurability, relevance, and reliability, are required to be fulfilled.