PLEASE POST A COMMENT Strengths and weaknesses of the 4 methods of revenue recog

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PLEASE POST A COMMENT

Strengths and weaknesses of the 4 methods of revenue recognition for Hertzel Advertising Agency: •

When advance billing occurs the collection of payment is not guarantee, the strengths of this method is that the company develops advertising copies and layouts, the agency makes estimates and adjustments are very small this would be a plus for this method. The weakness of this method is that the service has not being completed yet and there is only an estimate for the service provided that always brings rooms to adjustments since estimates are not 100% accurate.

•When the payment has being received by the customer the collection is already guaranteed, the strengths of this method is that we don't have to estimate anything, when the payments is received we have the correct information, no adjustments are necessary to be made, we have actual information. The weaknesses is the timing when the payment is received, if it is before the service is performed then the collection is too early and if it is after it is late to recognize revenue.

•When the payment is received in the month of the advertising, this method has basically no room for mistakes since the service has already being performed and the agency knows by this time the actual amount to be collected. The weaknesses, is that at this point we don't know what accounts are going to be noncollectable, therefore the agency may have to estimate this amount.

•Payment is received when the bill for advertising is sent, by this time the agency already will have the advance payments so they just will need to calculate the balance, no estimates so it will be very accurate. The weaknesses, it is the timing the agency will have accurate information but by this time all services have being performed and not collection attempt has being involved and this could be a weakness. I think the 4 methods have strengths and weaknesses, I would suggest to the agency to go with the second one, recognize the revenue when delivery has occurred or services have been rendered, with this method the agency won't have a lot of room for mistakes since it will be working with actual information and not estimates.

Explanation / Answer

I do agree with choosing out the second option but if possible then choose combination and 1st and 2nd options where 1st option provides that we record the sales as and when advance billing occurs. It sall eleminate the weakeness of the secondm method of early or late recognition, also for the contracts for whom advance billing is not done second option can be chosen,

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