A realization principle does well at matching a consumption tax base in the simple toy examples we gave above, and those examples do match some typical cases. However, a realization principle doesn’t consistently replicate a consumption tax base in real life. Some arguments to this effect are articulated in an amicus brief to the Court in the Moore case filed on behalf of a group of tax economists that includes Kyle Pomerleau, formerly of Tax Foundation. Overall, the realization concept is a useful tool in providing accurate financial information to ensure that companies are properly managing their finances.

As you will see in the
next chapter, included as product costs for purchased goods are invoice, freight, and insurance-in-
transit costs. For manufacturing companies, product costs include all costs of materials, labor, and
factory operations necessary to produce the goods. Product costs attach to the goods purchased or
produced and remain in inventory accounts as long as the goods are on hand. The result is a precise matching of cost of goods sold expense to its
related revenue.

Completed contract method to recognize revenue

The revenue shall be recognized when such goods are delivered or the services are rendered to customers. For example, if a customer orders a subscription-based service, revenue can be recognized when the service is provided to the customer, and the customer has control over the service. If the customer cancels the subscription before the end of the subscription period, revenue can’t be recognized for the remaining period.

Uncle Joe buying lemonade from you is a recognized event even though no cash was exchanged. It dictates that
purchased or self-constructed assets are initially recorded at historical cost. Historical cost is the
amount paid, or the fair market value of the liability incurred or other resources surrendered, to
acquire an asset and place it in a condition and position for its intended use.

Why Moore v. U.S. Won’t Get Us a Consumption Tax Base

With this Synder’s reporting feature, you’ll  be able to get financial data insights in real time and make your  decisions data-driven. For example, a construction company that builds a house for a customer would use the completed contract method to recognize revenue. realization principle Revenue is recognized when the building is completed and transferred to the customer. For example, if a customer orders a software product, the transaction price may include the purchase price, any maintenance fees, and any installation or training fees.

• The realization concept focuses on the actual payment received as a result of a transaction.
• The point of sale method recognizes revenue at the time of sale, regardless of when the payment is received.
• SFAS 157 defines “fair value” as “the price that would be received to sell an asset or paid to transfer
  a liability in an orderly transaction between market participants at the measurement date”.
• The realization principle gives an accurate view of a business’s profits by ensuring that income is not recognized until the risk and rewards have been transferred.
• The second criterion for revenue recognition is the identification of the performance obligations.
• This means that Plants and More would recognize the percentage of total income that would match the percentage of the total job that has been completed.

While the said transaction is subject to donor’s tax, strictly speaking, it is not an income subject to income tax because what is taxed in a donation transaction is the gratuitous transfer of property. The most popular performance metric used by public accounting firms to determine the profitability of client engagements is realization, which is calculated as the total amount invoiced divided by the total labor charged for a job. The gain and loss recognition principle states that we record gains only when realized, but
losses when they first become evident.