Chapter 6, Problem 6.1Q

What are the five key steps a company follows to apply the core revenue recognition principle?

To determine

The revenue recognition principle:

The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.

To describe: The five key steps to applying the revenue recognition principle.

Explanation of Solution

The five key steps to applying the revenue recognition principle are as follows:

1. 1. Identify the best contract with a customer,
2. 2. Identify the requirements of the contract,
3. 3. Compute the business price,
4. 4. Allocate the business price to the performance requirement, and
5. 5. Recognize the revenue, when (or as) each performance requirement is satisfied.