Example of Revenue Recognition Concept
1. Let’s consider a software company that sells annual subscriptions to its cloud-based project management software. When a customer purchases a one-year subscription, the Revenue Recognition Concept dictates that the company should not recognize the entire subscription revenue upfront but rather spread it over the subscription period. So, if the customer pays $1,200 for the one-year subscription, the company would recognize $100 of revenue each month for 12 months. This aligns with the concept’s emphasis on recognizing revenue when it is earned over time, reflecting the ongoing delivery of the software service to the customer.
2. Another example involves a construction company working on a long-term infrastructure project. Instead of recognizing the entire contract value as revenue at the project’s initiation, the Revenue Recognition Concept requires the company to recognize revenue as it reaches specific milestones or as costs are incurred. For instance, if a project is expected to take two years to complete with agreed-upon milestones, revenue is recognized gradually as those milestones are achieved, providing a more accurate reflection of the company’s progress and performance.