A customer terminated a
When and how should the revenue be recorded?
Answers
GAAP states that revenue should be recognized when earned. The day the agreement was signed the customer has an obligation to pay the $500,000 and as far as I can tell, your company has fulfilled all of its obligations. Therefore, I believe that the the revenue can be recognized in September by debiting AR and crediting revenue.
Revenue is recognized when the product is delivered or the service has been rendered. So long as any services related to the contract, the revenue can be recognized.
As far as I understand, these "revenue" that you talk about are penalty fee for premature terminating the contract. If so, than you have official memo for terminating the contract and is dated dd.mm.yyyy. This is the date that the conditions of the contract are fullfilled for issuing a debit memo to ask these penalty fees and also to recognize revenue at that moment. The expected payment date has nothing to do with rev.rec. Also, i would book it on other income because these are not revenues from opperatons and should be booked sepparately from op.rev. If you had booked reservations for this situational
I agree with other comments that the revenue is earned as of the date the parties execute the binding termination agreement. I do think it is revenue, since the payment is received from a customer and relates to a revenue transaction, even if it is a cancelled one. You might want to classify it as "other revenue" so that it can be tracked separately for margin analysis or other purposes.
Agree. Don't Confuse Cash with Revenue Recognition. As the first Note satys, GAAP states that Revenue is earned/recognized when the product/service has been delivered. However in your case I would choose Other Revenue as the solution to keep your Core Revenue "clean". This will help in various analysis' and e.g. extrapolations/forecasting, as you do not want to include such Cancellation Fees (unless it's an ingrown part of your business - and therefore can be forecasted too).
If you have NO obligations after the 31st of September - and you have a written confirmation of the Cancellation fee to be paid in October - I would record all in September under Other Revenue.
Regards,
Rino
I agree with what others have recommended (Other Revenue/Income) but will cite a another reasoning for it. Recognizing it as Revenue without the corresponding cost/s (matching) will skew your Margins (ratios).