Financial Accounting Assignment: Revenue Recognition Five-Step Process

This document presents a solution to a financial accounting assignment, focusing on the concept of revenue recognition. The solution applies the five-step process outlined in AASB 15 to a case study involving Reliable Mowing and We Care Aged Care Pty Ltd. The assignment analyzes three contracts, identifying performance obligations, determining transaction prices, and allocating revenue recognition over time. The solution details the application of each step, providing specific dates and amounts for revenue recognition, including the impact of GST. The document serves as a practical example of how to apply accounting principles to real-world business scenarios, and the solution demonstrates a clear understanding of revenue recognition standards.

FINANCIAL ACCOUNTING

REVENUE RECOGNITION (question 6)
Applying the five-step process for revenue recognition
Revenue recognition is the concept which states specific conditions by which revenue of an
organisation can be recognised. It is a generally accepted accounting principle which every
organisation has to follow for maintaining effective accountability in their firm. In the given case
of Reliable Mowing, this organisation has entered into three contracts with We Care Aged Care
Pty Ltd. According to AASB 15 Revenue from Contracts with Customers, there are total of five
steps which are needed to applied for recognising the revenues.
Step 1: In the first step, Reliable Mowing should analyse whether or not the contract is
enforceable by law and the customer is intended to fulfil the obligation. The company has
entered into three contracts in a week with the same customer that is We Care Aged Care Pty
Ltd. It should be evaluated that there is a valid intention of paying amount against all the
contracts.
Step 2: In this step, performance obligations in a contract must be identified. The Reliable
Mowing should assess their agreement and review whether or not they have provided the
services to their customer as promised in their contractual agreement.
Step 3: Here, Reliable Mowing should determine their transaction price which they entitled
to receive against the services provided to their customer i.e., is We Care Aged Care Pty Ltd. It
should be noted that all the expenses are accurately recorded which can include variable
component, financing component, non cash consideration and non refundable fees.
Step 4: In this stage, Reliable Mowing should allocate the transaction price to the
performance obligations in the contract. A total of three contracts are signed between these
parties which are Lawn Mowing, Gutter Cleaning and Furniture Assembly. All performance
obligations must be reviewed from all contracts and then prices must be allocated for all the
obligations.
Step 5: In this final step, the revenue can finally be recognised after fulfilling all the
performance obligations mentioned in contract. When the obligations are satisfied over time,
revenue can be recognised at the fulfilment. The total contract amount which Reliable Mowing is
entitled to including and excluding GST is mentioned as follows along with their recognition
dates:
1

Date of
Contract Description
Contract
Price (GST
Exc)
Stand Alone
selling price
(GST Exc)
Revenue
recognition
date
2 February,
2021 Lawn Mowing $330,000 $275,000 31-Jul-21
6 February,
2021 Gutter Cleaning $82,500 $110,000 19-Aug-21
10 February,
2021 Furniture Assembly $137,500 $165,000 30-Aug-21
GST amount $55,000
Total $605,000
2

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