Consider the earnings process applying to a travel agent and an airline company and then defend the criteria for recognizing revenue in each of the two cases.
A travel agent helps a customer purchase an airline ticket and recognizes revenue for its commission at the point the customer purchases the ticket. Some argue that revenue recognition is appropriate because the earnings process of the travel agent—helping the customer make travel plans and arrangements—is largely completed once the customer purchases the ticket. What do you think?
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In contrast, an airline that provides the same upfront service with its own in-house sales force cannot recognize revenue for these services because the airline’s earnings process is incomplete until the flight itself is provided.
Required: discuss the factors to be considered in determining when revenue should be recognized in measuring the income of a business enterprise. Discuss the reasons why you believe that revenue recognition is treated differently under these two different scenarios with in the airline industry.