What distinguishes a principal from an agent in terms of revenue recognition?

In the context of revenue recognition, the distinction between a principal and an agent revolves around their respective roles in a transaction and how that affects the recognition of revenue.

A principal is the party that directly provides goods or services to customers, and they have control over the goods or services before they are transferred to the customer. As such, a principal recognizes revenue based on the total consideration they expect to receive from the customer for those goods or services. This expectation includes the gross consideration before any costs or commissions are taken into account. This principle aligns with the recognition criterion under ASC 606, which emphasizes recognizing revenue when control of the asset is transferred to the customer.

In contrast, an agent serves as an intermediary and does not have control over the goods or services being delivered. Instead of recognizing revenue from the total sales price, an agent recognizes revenue based only on the commission or fee they earn for facilitating the transaction.

The correct answer reflects the understanding that a principal recognizes the entire expected gross consideration, highlighting the difference between the roles in revenue transactions. This definition is crucial for accurately applying revenue recognition principles in various business scenarios.