Question

A flower shop makes a large sale for $1,200 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,200 considered to be recognized? A. December 5 B. November 30 C. December 10 D. December 1

Answer 1

Answer:

B. November 30

Explanation:

The revenue recognition principle under GAAP states that revenue has to be recognized when services are performed or sales  made irrespective of its invoicing or collection date.

Since the sale was made on November 30 the revenue is to be recognised on this date.

The other options A and C are the dates on which the statement was sent or the collection date which are not relevant for revenue recognition.

Answer 2

Answer:

B) November 30

Explanation:

Accrual accounting and the revenue recognition principle state that revenue should only be recognized once the earning process has been substantially completed by the company. In this case, the earning process was completed by the company in November 30 since it sent the flowers that day.

The journal entry should be:

November 30, merchandise sale

Dr Accounts receivable 1,200

    Cr Sales revenue 1,200

Accrual accounting recognizes revenues and expenses during the periods that they actually occur in, not when a cash flow is associated with them (payment or collection).