Question

After the presentation of your report on the examination of the financial statements to the board of directors of Piper Publishing Company, one of the new directors expresses surprise that the income statement assumes that an equal proportion of the revenue is recognized with the publication of every issue of the company’s magazine. She feels that the “crucial event” in the process of earning revenue in the magazine business is the cash sale of the subscription. She says that she does not understand why most of the revenue cannot be “recognized” in the period of the cash sale. Discuss the propriety of timing the recognition of revenue in Piper Publishing Company’s accounts with:

(a) The cash sale of the magazine subscription.

(b) The publication of the magazine every month.

(c) Over time, as the magazines are published and delivered to customers.

Answer 1

The fundamental concept in accounting for revenue is Revenue recognition concept. As per Revenue recognition concept the revenue should be recognised in books of account as and when the goods are delivered to customer and service is performed.

a) Cash sale of magazine cannot be the basis of recognition of income as per revenue recognition concept. The advance money received should be part of unearned revenue. The Unearned revenue is recognised in books based on when magazines are delivered to customers

b) The publication of magazine every month is the production of goods. It is part of inventory and it does not give revenue to the firm unless it is sold to the customers

c) The revenue is recognised when magazines are published and delivered to customer. This is in line with the Revenue recognition concept. This is also as per accrual concept which is the fundamental accounting assumption. As per accrual concept revenue should be accounted when they are earned that is when goods are delivered to customer irrespective of cash received from customers.