Which is the first step in the five-step approach to revenue recognition?

The first step in the five-step approach to revenue recognition is to identify the contract with the customer. This step is crucial because it establishes the framework for what the entity has agreed to provide to the customer and what the customer has agreed to pay. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. By identifying the contract, the company clarifies the terms and conditions, including any specific promises or expectations related to the delivery of goods or services.

Without this initial identification, it would be difficult to assess the nature of the performance obligations or to allocate transaction prices appropriately. Therefore, this foundational step is essential for the accurate recognition of revenue in subsequent stages of the revenue recognition model. Understanding the contract in detail ensures that the company adheres to the principles of revenue recognition set forth in the applicable accounting standards.