Bed Linens Online Sales – When to Recognize Revenue

Consider the case of a company that manufactures and sells bed linens online. In accounting, revenue from these finished goods is said to be realized at the time they are delivered to the customer, not at the time they are manufactured or at the time orders are placed by customers.

Suppose that in 2009, bedding comforters sets were manufactured. In January 2010, a customer placed an order of these goods. The goods were delivered in February 2010. When is revenue realized? The revenue is realized in February.

As you may surmise, in the case of a company that sells services, rather than goods, revenue is recognized at the time the services are furnished or rendered and not at the time it was contracted.

Suppose that in January, Window Treatments Unlimited contracts to install valance board and curtains to Mrs. Jones windows. The valance board and the curtains were installed in February. Mrs. Jones pays the price in March. In what month would Wall Treatments Unlimited recognize revenue? Wall Treatments Unlimited would recognize revenue in February.

The fact that revenue is recognized at the time it is realized is called the realization concept. This realization concept tells us when to recognize revenue.

Revenue is realized when a sale is consummated through the delivery of goods or services. Because of this, the word “sales” is sometimes used as a synonym for revenue, and sometimes you will see the phrase “sales revenue.”

As in the case of expenses, revenue may be recognized before, during or after the period in which the associated cash receipt falls. To begin with, let us consider a case in which revenue is recognized in the same period as that in which the associated increase of cash occurs.

Using the same example above, in January, Window Treatments Unlimited installed valance board and curtains at Mrs. Jones house; Mrs. Jones pays $100 cash. In keeping with the dual aspect concept, this transaction will have two effects on the accounts of Window Treatments Unlimited. It will change both sides of the balance sheet – i.e., the assets and the equities.

This transaction will affect the Cash item on the asset side of the Window Treatment Unlimited balance sheet. That is, the following changes would be made: Cash increases by $100; Owner’s Equity increases by $100.

In January, Mattress Pads Company sells and delivers mattress pads to Mr. Ace, who pays $50. In this example revenue is recognized at the same time as the related cash receipt.

On January 5, 2010, Mattress Pads Company sells on credit to Mr. Jack for $60. Mattress Pads Company bills Mr. Jack, requesting payment within 30 days. In this case revenue is recognized prior to the related cash receipt.

When revenue is recognized prior to the related cash receipt as in the case above, the increase in revenue is accompanied, not by an immediate increase in cash, but rather by the right to collect the cash, which is called an account receivable.

Thus the two entries necessary to record the above transaction would be: Revenue or Owner’s Equity increases, $250; Accounts receivable increases, $250.

When a customer pays a company for a business he has previously made on credit, the company records an increase in cash and a corresponding decrease in accounts receivable.


Thus when Mr. Jack sends a check for $60 to pay for his mattress pads, Mattress Pads Company makes the following entries: Cash increases, $60; Accounts receivable decreases, $60.

So far we have treated the cases in which 1) revenue is recognized at the same time as the associated cash receipt; 2) revenue is recognized prior to the associated receipt of cash.

We shall now take up the case in which 3) revenue is recognized subsequent to or after the associated receipt of cash.

When a customer pays a business in advance for a service or product, the business has an obligation to render the services or deliver the product. This obligation appears on the balance sheet as a liability under the title “Deferred revenue.”

Thus when a business receives cash in advance towards a sale, it records an increase in cash and a corresponding increase in the liability, deferred revenue.

Suppose, Quilts &Shams Enterprise receives an advance of $500 from a retailer, for the delivery of bed linens, sheet sets, luxury quilts, pillow shams, bed in a bag set, bed skirts, dust ruffles, blankets, etc. The entries that should be made on the accounts of Quilt & Shams Enterprise: Cash increases, $500; deferred revenue increases, $500.

Later, when the goods are delivered, Quilts & Shams Enterprise will recognize the $500 revenue and will record a corresponding decrease in liability, deferred revenue. The two entries that should be made when the goods are delivered: Revenue or Owner’s Equity increases, $500; Deferred revenue, decreases, $500.

To summarize, revenue are recognized at the time goods or services are delivered. An accountant may recognize revenue prior to the related cash receipt by setting up an asset entitled “Accounts receivable.” Or, the accountant may recognize revenue subsequent to the related cash receipt by setting up a liability entitled “Deferred revenue.”


PureComfortLinens.com, the ecommerce outlet of Vicera Enterprises, Inc., a duly registered corporation, offers a wide variety of high quality bedding and accessories for every bedroom in your house. It carries simple and colorful linens, stylish bedspreads, conventional comforters with self corded edge finish, etc., balmy pillows, beautiful pillow cases and other bed accouterments. We have been providing consumers with durability and comfort at reasonable prices.