Accounting

Agency and principal relationship versus revenue recognition

The distinguishing features of an agency and principal relationship and the consequences for revenue recognition.

 In an agency relationship, amounts collected on behalf of the principal are not gross inflows flowing to the agent and thus do not meet the definition of revenue. Rather, the revenue is the amount of commission received or receivable by the agent. In practice this is addressed by identifying who bears the risks and rewards of the goods or services to be provided.

 

The party bearing the majority of the risks and rewards would usually be the principal in the transaction and would recognize revenue gross.

Factors to consider include:

  • who is responsible for product or service faults;
  • who bears any warranty obligations; and,
  • who takes ultimate responsibility for performance of the goods.
  • agency and principal relationship

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