revenue recognition

Hi Karen

The difference in the accounting treatment is a result of the fact that $3m has been received. If we are to debit Cash (as we surely must) with $3m, what do you propose to do with the $3m credit?

Imagine this in practice. Until the goods are delivered, that $3m already paid is a liability to the customer. IF that $3m were to be put on deposit, it would earn 4% ($120,000). That “income” is really attributable to the customer – it’s his money that was on deposit. Thus we debit interest expense and increase the value of the liability to $3,120,000

Upon the event of delivery, we eliminate the liability (debit liability $3,120,000) and recognise the revenue including the $120,000 (credit revenue $3,120,000)

In the earlier part of the question, the cash has not been received so it would only be appropriate to recognise the discounted figure as revenue with the unrolled discount recognised in subsequent years as interest receivable. as each year sees us unroll that discount, the double entry would be debit the receivable and credit finance income until the due date for payment when we can then debit Cash and credit the Receivable

Is that ok for you?

It’s an expense because the other side is an increase in the liability (debit? and credit liabilities) When the revenue is eventually recognised at $3,120,000 the $120,000 element will “cancel” the previous year’s expense leaving us with a net revenue recognised at $3m.

If you borrow someone else’s money and earn interest on it, surely that represents an increase in your liability to the other person and that increase in the liability is matched by the expense.

Is that ok?