The five steps of Revenue Recognition
Revenue is one of the most important figures in a company’s financial statements; usually very large. In addition, it usually determines the profit the company makes and is used to predict sales. However, due to different corporate revenue recognition principle accounting processes and similar shortcomings in corporate revenue recognition, there has been a challenge in determining how revenue should be viewed. For this reason, the IASB and the FASB have developed a consolidation rate that can analyze the amount of time that has to be identified. The new standard includes five steps that determine how and when a payment should be received, and this section will explain in more detail.
Revenue Recognition Principle 5 steps
Revenue Recognition Principle 5 steps. The first step is to identify the contract with the customer. A contract is usually an agreement between two or more parties that deals with applicable rights and obligations. Some of the conditions that must be met when calculating contract costs between a firm and a customer as revenue per standard indicates that all parties involved must ratify the agreement and have legal obligations to perform their duties under the contract. Each group’s rights regarding the goods and services used must be determined.
The second step is to identify the contractual obligations under the contract by the trading company (Young et al., 2018). This is just that the buyer pays the seller to get the delivery. The customer must benefit from the good, and the company’s promise to transfer the product should be separated from other contractual obligations.
The third step is to determine the amount of work that reflects the value of the company that expects to own the product. The transaction price is usually the amount that the company assigns to per
m the obligations under a given contract. The fourth step is to assign the amount of work to the performance obligations identified in the second step. Managers determine the individual sales value of all items and assign job prices according to the relative value compared to the total value of each product. Finally, revenue recognition is done when operational commitments are satisfied by transferring the promised product to the customer. The customer may have a future right to regulate the use of the goods and reap significant benefits.
Starbucks and a five-step awareness model
Starbuck’s Form 10-K shows how the company uses a five-step model. Most of the sales and revenue of the company comes in the form of sales at licensed stores and corporate consumer stores. Sales and revenue also come from packaged products and profits from Nestle and other partnerships. The five-step process is based on how income is expressed on a 10-K form. The company owns patents and trademarks so that its products have a recognized standard in their operations. A clear boundary is seen where licensed store funds are distributed to track revenue.
Prevent fraud in financial statements
The five steps of Revenue Recognition process is very important in preventing fraud in the financial statements of all organizations that own Starbucks. Adherence to the procedure gives the collateral permission to meet the contractual obligations, and the funds remain secure. In addition, it provides a form of backup to ensure that anything recorded in the financial statements is consistent with all that was agreed upon and included in the contract process (Ambarchian, 2018). Besides, it is also possible to cover any amendments to the five-step model to add additional corporate security and customer accountability.
Firms need to follow a five-step revenue recognition process regardless of the level of calculation they use. For example, Form 10-K for Starbucks shows how the company uses the method. In addition, the use of the model allows for transparency and prevents fraud in the financial statements of organizations.