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Scenario : The annual fee is payable in advance each year with the first annual payment being paid on the date the contract commences. Y/e 31 dec 2013
Audit risk: Revenue may be overstated if it is recognised according to the contract date rather than over the relevant accounting period
Explanation.. revenue should be recognised in the a/cing period in which related performance obligations are met
My question is how will revenue be overstated if recognised according to contract date
A contract for eg for the supply of maintenance services for y/e 31/12/2013 might be signed on 12/12/2012 and paid for on 20/12/2012. The revenue should not be recognised until 2013 ie is not part of the 2012 revenue.
The double entry would be something like:
DR Cash
CR Payments received in advance (which would be on the SOFP)
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