At what point are revenues considered to be earned?

Revenues, which are derived from an entity’s main activities such as the sale of merchandise or the performance of service, are considered to be earned when the earning process has been substantially completed.

For example, a merchandiser’s sales revenues are considered earned when the goods have been shipped or delivered to the customers and the merchandiser has a right to a collectible accounts receivable. (Under accrual accounting it is not necessary to have received the cash in order to have earned the revenues.) The reason is that the substantial and difficult parts of the selling process (having the merchandise, finding customers, getting customers to place orders, and delivering the merchandise to customers) have been completed. Collecting the accounts receivable is usually an automatic process which requires little or no effort.

General guidance for determing when revenues are earned can be found in paragraphs 83 and 84 of the FASB’s Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises and in an Intermediate Accounting textbook.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.