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Hi
When a company recognises revenue too early, ie havent met the criteria
should the accounting treatment be a contingent liability and then it goes to P/L when the criteria has been met?
looking at exam question Rocket, 16biThanks
Hi Mr. Nothing123,
The reporting standards does not allow early recognition of revenue, so the correct treatment should be reversal of the revenue recognized.
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Further explanation:
The originial entries to recognize revenue would be,
Dr Trade receivables
Cr RevenueAs per your point, if we were to reverse it by moving the revenue to contingent liability, the entries would be, (which is incorrect)
Dr Revenue
Cr Contingent liabilitySo after this entry, only the revenue would have been cancelled out, however, trade receivables still would exist. This would be incorrect as we have not yet fulfilled our contractual obligations thus the customers are not yet liable to pay us. Further, we have not yet received any payment, as such, we cannot recognize any contingent liability either.
The correct entries would be,
Dr Revenue
Cr Trade receivablesHope this helps.
Good luck for your exams !!!
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