 As we learn more about receivables, we need to consider the underlying events that create receivables. So to start with, let's revisit revenue recognition. Hopefully you recall that revenue is recognized, meaning journalized, when service is performed or goods are delivered. The FASB has since revised this definition to say that revenue is recognized when a specific critical event has occurred and the amount of revenue is measurable. For an accounting principles class, the specific critical event that occurs are either, again, services are performed or goods are delivered. The amount of the journal entry is the fair value of the asset received. Usually that will be cash, but not always. The FASB has created a five-step process to determine whether or not revenue should be recognized. The basis of the five-step process is whether or not a contract exists. So here I've listed the five-step process. Let's look at each one of these in more detail. Step one is identify the contract, meaning does a contract exist? Are the parties of the contract in agreement are the terms clear? Things like that. Step two is identify the performance obligation, meaning who does what? Does the contract specify what is expected of each party? Step three is determine the transaction price, meaning what is owed to us? We need to consider both cash and non-cash receipts. Step four is allocate the transaction price to the performance obligation, meaning do we need to split up the revenue? If the revenue is earned over a period of time, we need to recognize it over that time. Step five is the final step. If the first four steps are met, then we can recognize revenue when we satisfy the obligations, meaning revenue has been earned as we perform our obligations, we can record the revenue.