What do we have in common? During production - If revenue is recognized during production than the

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What do we have in common?

During production - If revenue is recognized during production than the prudence concept of accounting is not followed that is to provide for future losses but not for future incomes. The risk is during production it is not certain that whether goods shall be sold in current period or not so correct revenue recognition shall not be possible. As per accrual basis transaction is not been incurred and revenue must not be recognized.

Production complete -

If revenue is recognized when production is complete than the prudence concept of accounting is not followed that is provide for future losses but not for future incomes. The risk is that it is not certain that whether goods shall be sold in current period or not so correct revenue recognition shall not be possible. As per accrual basis transaction has not been incurred and revenue must not be recognized.

Receiving order from customer - This is also not a correct stage to recognize sale, receiving order do not guarantee that sales will in current accounting period or order might get cancelled too thus it is not good basis to recognize sales. As per accrual basis transaction has not been incurred and revenue must not be recognized.

Point of sales - This is correct stage to recognize sales as per accrual basis transaction has bees incurred and revenue must be recognized.

Cash collections - Cash collection does not guarantee recognition of sales as cash can be collected in different accounting period other than period in which transaction is incurred. Thus it has risk of not recognizing revenue in proper accounting period.

Before production: Recognizing revenue at this point has the highest risk of error since you have not really met any of the 4 criteria, unless you already have evidence of a sales arrangement which is prompting you to commence production. Even if you have a sales arrangement which is prompting you to commence production, you haven’t met conditions 2, 3 nor 4. If you are about to produce a service or product in the hopes of generating income, you cannot state that you are generating revenue yet unless you already have a customer and are in agreement. You most likely run a risk of violating all 4 conditions at this point. Reporting revenue at this point would be a serious risk.

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During production: If you have a customer who is going to buy your product or service, you run moderate risk at this point in terms of violating the SAB criteria for reporting revenue. The only thing you might risk violating is condition 2 and 4. However, like with before production, if you do not have evidence of a sale or cannot expect cash to be paid to you once production is complete, you cannot report any revenue because you risk violating all four conditions.

Production complete: This is the same as before or during production. You cannot report revenue unless you know you have a customer who you have some level of certainty is going to pay you once the product or service is delivered. The production phase has the highest level of error because even at this point if you had a customer but they haven’t paid you yet, they can always back out and not even purchase your product or service.

Receive customers’ Order: Once you receive an order, you have most likely met conditions 1, 3, and 4. You have a sales arrangement since the customer has placed an order, the price is already set, and you can be confident in receiving cash payment since there is an order secured with a customer. The only thing that may lead you to a violation is that condition 2, which is delivery of product or service, hasn’t been made. Condition 4 may be an issue in the future if you never receive payment also.

Point of Sale: At this point the risk is very minimal. You have a sales arrangement, the product was delivered, the price was determined, and you most likely feel confident in receiving your unpaid cash. The only thing that could be a risk is if you reported revenue, delivered the product, and your client never pays you. Thus, the only condition you have to worry about is number 4 point. At this point you can report revenue with very little risk.

Cash collection: This is the only point in which you can actually report and recognize revenue with no risk at all. You have followed all four criteria and collected your cash. Once you have delivered your product or service and received cash, you have no risk in terms of violating the SAB 101 criteria.