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The Corporate Finance Institute Accounting
June:
DR Cash: 90,000
CR Instalment Accounts Receivable: 90,000
DR Deferred Revenue: 90,000
CR Sales Revenue: 90,000
DR COGS: 72,000
CR Deferred COGS: 72,000
September:
DR Cash: 210,000
CR Instalment Accounts Receivable: 210,000
DR Deferred Revenue: 210,000
CR Sales Revenue: 210,000
DR COGS: 168,000
CR Deferred COGS: 168,000
Revenue Recognition principle for the provision of services
One important area of the provision of services involves the accounting
treatment of construction contracts. These are contracts dedicated to
the construction of an asset or a combination of assets, such as large
ships, office buildings, and others that usually span multiple years.
In recognizing revenue for services that last for long periods of time,
IFRS states that revenue should be recognized based on the progress
towards completion, also referred to as the percentage of completion
method.
These contracts are of two kinds: fixed-price contracts and cost-plus
contracts. In fixed-price contracts, the contractor/builder agrees to
a price before construction actually begins. Thus, all the risks are
imposed on the contractor. In cost-plus contracts, the price depends
on the amount actually spent on the project plus a profit margin. For
companies reporting under ASPE, the completed-contract method may
also be used. Different from the percentage of completion method, the
completed contract method only allows revenue recognition when the
contract is completed.
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