A furniture manufacturer receives a purchase order from a client for a customized wooden cabinet. The cabinet will be delivered and paid for upon completion which is estimated to be in three months from now. This event would trigger a journal entry on the manufacturer's books if the earnings approach were used, but not if the contract approach were used.

Question

Quizplus · Accepted Answer

The contract approach recognizes revenue and expenses only when the criteria for revenue recognition are met, such as when the goods or services are delivered or performed, regardless of when payment is received. Therefore, the receipt of a purchase order or the estimated completion date would not trigger a journal entry under the contract approach.

A Furniture Manufacturer Receives a Purchase Order from a Client