Case 3-1 Accrued revenue
The following is an excerpt from a conversation between Monte Trask and Jamie Palk just before they boarded a flight to Berlin on American Airlines. They are going to Berlin to attend their company’s annual sales conference. Monte: Jamie, aren’t you taking an introductory accounting course at college? Jamie: Yes, I decided it’s about time I learned something about accounting. You know, our annual bonuses are based on the sales figures that come from the accounting department. Monte: I guess I never really thought about it. Jamie: You should think about it! Last year, I placed a $900,000 order on December 27. But when I got my bonus, the $900,000 sale wasn’t included. They said it didn’t ship until January 5, so it would have to count in next year’s bonus. Monte: A real bummer! Jamie: Right! I was counting on that bonus, including the $900,000 sale. Monte: Did you complain?
Jamie: Yes, but it didn’t do any good. Sophia, the head accountant, said something about matching revenues and expenses. Also, something about not recording revenues until the sale is final. I figured I’d take the accounting course and find out whether she’s just jerking me around.
Monte: I never really thought about it. When do you think American Airlines will record its revenues from this flight?
Jamie: Hmmm, I guess it could record the revenue when it sells the ticket . . . or when the boarding passes are taken at the door . . . or when we get off the plane . . . or when our company pays for the tickets . . . or I don’t know. I’ll ask my accounting instructor.
Discuss when American Airlines should recognize the revenue from ticket sales to properly match revenues and expenses.
