how to recognise revenue from sales with extended payment terms? i.e. 120 days vs. normal 30days?

Question

I would like to specify the question a little bit. My company recognise the revenue when we ship the products. Normally our payment terms are 30days, however one big company wants to have payment terms of 120 days. 120 days is way over the normal terms and therefore I am bit unsure whether I can recognise the revenue when we ship the products or not. We have a reasonable reserve against non-payment. Thanks for your help

Answer 1

Edward's answer is good. Recognizing revenue under US Generally Accepted Accounting Procedures, as well as recognizing expenses, and almost everything else in accounting, can be done almost any way you want SO LONG AS YOU ALWAYS DO IT THE SAME WAY. You can recognize revenue when earned (that is, the day you shipped the product) - many large companies do this. I in fact do this because it gives me a better picture of how my business is doing. I take a reserve against non-payment for a reasonable percentage of my receivables, then the reserve becomes recognized as income if everybody actually pays me (don't hold your breath).

Answer 2

If I understand the question, all sales that are not paid by cash become Accounts Receivable.
It becomes a "Sale" the day it is completed.
When the account receivable is paid, "Cash" is debited and "Accounts Receivable" is credited.

Even your 30 day accounts are Receivables, until paid.
If you have a sale on the last day of a month, or fiscal period, and the payment is not deposited on that last day of period, and you include that sale in the period just ended, and the payment is deposited the next period or month, that sale becomes a Receivable for the period just ended, even though it's only one day.

Receivables are assets.

Any interest involved is considered Interest Income, not part of the sale.