A new client the Wolf Company asks your advice concerning th

A new client, the Wolf Company, asks your advice concerning the point in time that the company should recognize revenue from the rental of its office buildings. Renters usually pay rent on a quarterly basis at the beginning of the quarter. The owners contend that the critical event that motivates revenue recognition should be the date the cash is received from renters. After all, the money is in hand and is very seldom returned. Discuss why you agree or disagree with the position of the owners of Wolf Company.

Solution

I disagree with position of the owners of Wolf Company because there are two requirements to before revenue can be recognized i.e. earning process is complete and reasonable certainty as to the collectibility of the asset to be received or the amount is recieved. Since here, client have recived the money but the earning process is not complete it will be wrong to recognize rent recieved in advance as revenue.