The first step in the revenue recognition process is determining if a contract is in place between the seller and the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations. The standard states that a contract may be written, oral, or implied by customary business practices. To be a contract, the accounting standard states that it must meet five criteria.
Required:
Discuss the criteria necessary for a contract to be considered under the revenue recognition process. How would a company account for a contract that does not meet the criteria?
Discuss the criteria required for a contract to be considered under the revenue recognition process and explain the manner in which the company will account for a contract that does not meet the criteria.
Contract:
Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.
Criteria that company must apply to revenue recognition standards to contracts are as follows:
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