 Recognition criteria

Liability :
1. The outflow of resources embodying economic benefits (such as cash) from the entity is
probable.
2. The cost / value of the obligation can be measured reliably.

Equity :

1. Income is recognised in the income statement when an increase in future economic benefits
related to an increase in an asset or a decrease of a liability has arisen that can be measured
reliably.
2. Expenses are recognised in the income statement when a decrease in future economic
benefits related to a decrease in an asset or an increase of a liability has arisen that can be
measured reliably.
 Revenue recognition criteria :
1. Collection probability. If it is not possible to make a reasonable estimate of the amount of
the allowance for doubtful accounts, then do not recognize a sale until it is possible to do so.
If you are uncertain of the collection of cash from a sale transaction, defer sale recognition
until payment has been received.
2. Delivery is complete. Ownership of the goods must have shifted to the buyer, as well as the
risks of ownership. The buyer must also have accepted the goods. The SEC does not like bill
and hold transactions, and only allows them under restricted circumstances.
3. Persuasive evidence of an arrangement. The substance of a transaction (and not just its
form) should indicate that a sale transaction has indeed taken place. For example, the
consignment of goods does not constitute a sale until the consignee sells the goods to a
third party. The SEC specifically points out that the transfer of goods solely for
demonstration purposes is not an actual sale, nor is a transfer when the "seller" is obligated
to take the goods back at a specific price, or when the "buyer" has no obligation to pay for
the received items.
4. The price can be determined. The buyer no longer has the contractual right to unilaterally
terminate the contract and be paid back for any amounts already paid. If the price to be
paid is contingent on a future event, then you must wait for that event before recognizing
the sale. Also, if it is not possible to reasonably estimate the amount of any customer
returns, then you must wait for more certainty regarding this item before recognizing the
sale.