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What is difference between accounting for a long-term contract and accounting for a more normal sale of inventory to a customer?

College Accounting (Book Only): A Career Approach

13th Edition

ISBN:9781337280570

Author:Scott, Cathy J.

Publisher:Scott, Cathy J.

Chapter9: Sales And Purchases

Section: Chapter Questions

Problem 12DQ

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t is generally agreed that sales revenue should only be ‘realized’ and so ‘recognized’ in the trading, profit and loss account when:1. The sale transaction is for a specific quantity of goods at a known price, so that the sales value of the transaction is known for certain.2. The sale transaction has been completed, or else it is certain that it will be completed (e.g. in the case of long-term contract work, when the job is well under way but not yet completed by the end of an accounting period).3. The critical event in the sale transaction has occurred. The critical event is the event after which: i) It becomes virtually certain that cash will eventually be received from the customer.ii) Cash is actually received.Usually, revenue is ‘recognized’i) When a cash sale is made.ii) The customer promises to pay on or before a specified future date, and the debt is legally enforceable.The prudence concept is applied here in the sense that revenue should not be anticipated, and included in the…