Which is the correct sequence of the five steps in GAAP revenue recognition and their general purpose?

• A. Identify the contract; identify performance obligations; determine transaction price; allocate price to obligations; recognize revenue when the performance obligation is satisfied (control transfers).
• B. Determine fair value; identify contract; record revenue at contract signing; recognize as cash; adjust for warranties.
• C. Identify performance obligations; record revenue; allocate costs; recognize when payment is received; assess collectibility.
• D. Recognize revenue immediately; identify contract; determine transaction price; allocate to obligations; recognize when contract ends.

Answer: (A)

GAAP revenue recognition follows a five-step framework that centers on contracts with customers and the transfer of control. The steps are: identify the contract with the customer; determine the performance obligations in the contract; determine the transaction price; allocate that price to the performance obligations; and recognize revenue when the entity satisfies each obligation by transferring control to the customer.

This sequence is the best because revenue is recognized only as control over the good or service passes to the customer, and in the amount the entity expects to be entitled to for fulfilling those obligations. Jumping ahead to revenue before obligations are identified, or recognizing revenue at contract signing or upon payment, does not reflect when control is actually transferred or the amount earned.

Other options misplace steps or rely on timing (signing, cash receipt) that do not align with the requirement to recognize revenue as obligations are satisfied and control transfers.