Introduction
Organizations serve customers who pay for their services and products. Revenue is critical because it helps an organization to earn from its services. The airline industry has also established revenue recognition mechanisms.
Factors that Determine Revenue Recognition
There are various factors to consider while recognizing revenue. One of the factors is the collection probability. When it is not possible to make a reasonable estimate of the amount of doubtful debt, then it is not the time to recognize a sale. The accounts department must defer sale recognition until there is the receipt of the payment (Beil, 2013).
Another factor is to determine if the delivery is complete. Before any sale, the ownership of goods or services is the entity that is selling or providing to the buyer. Therefore, ownership of goods must have shifted to the purchaser (Semmelroth & Semmelroth, 2013). The risks of ownership must also shift to the purchaser. The buyer must also have accepted the goods or services.
The third factor is the persuasive evidence of the arrangement. The written documents that show proof of a transaction must prove that the sale has occurred. For instance, when the operation involves consignment, it is when the third party buys the goods that the deal is binding (Bragg, 2010). Just the presentation of documents does not legalize the sale. The buyer has obligations to pay for the goods received. If there are discrepancies and the buyer has doubts then the sale is still incomplete.
The fourth factor is that the price should be determined. The buyer should not have any reason to terminate the deal. However, if the is for the future date, then the accounting for such a sale must wait until that time to recognize the sale (Semmelroth & Semmelroth, 2013). If it is not possible to determine the customer returns, then it is advisable to wait for the right moment when they can be recognized.
Revenue Recognition in the Airline Industry
An airline travel agent helps a customer to purchase an airline ticket. The agency recognizes revenue for the commission at the point that the client buys the ticket. The work of the agent is to source for the airline the fits the customer’s concerns (Bragg, 2010). Once the customer has confirmed that it is the right carrier and pays for it, the work of the travel is with the airline and not the agent. And hence, such a transaction is complete according to the work of the agent with the customer. The purchase of the ticket confirms that the client is satisfied with the work of the agency. Whether the airline cancels the flight or has some other challenges, it does not affect the revenue of the travel agent directly.
On the other hand, when an airline provides the same upfront service with its sales force, the treatment of income is different (Beil, 2013). The airline’s earning process is incomplete at this level until it can provide the flight and the customer boards it to the desired destination.
The entire business for the airline is to ensure that the client who pays for the ticket boards the plane and travels to the booked location. If the payment does not lead to booking the flight and traveling then the purchase is not complete. The buyer must accept the service as fully provided for by the airline for the transaction to be complete.
The travel agent and the airline are in the same industry. However, their recognition of revenue is different. Therefore, their service provision is also unique.
References
Beil, F. (2013). Revenue recognition. New York, NY: Business Expert Press.
Bragg, S. (2010). Wiley revenue recognition. Hoboken, New Jersey: Wiley.
Semmelroth, D. & Semmelroth, D. (2013). Data marketing for dummies. Hoboken, New Jersey: John Wiley & Sons.