Final answer:
Revenue is recognized under the deposit method when the completion of a sale is uncertain. It differs from the installment-sales and cost-recovery methods as it does not recognize revenue until uncertainty is resolved. Explicit and implicit costs are associated with running a business and must be considered alongside revenue recognition.
Step-by-step explanation:
Revenue is recognized under the deposit method when there is a significant uncertainty about whether a sale will take place or the buyer's creditworthiness, or if the sale cannot be consummated within the normal operating cycle of the business. Under this method, any payments received are recorded as a liability rather than as revenue, and revenue is recognized only when the sale is completed and the uncertainty is resolved.
The deposit method differs from the installment-sales method and the cost-recovery method in that the latter two involve recognizing revenue over time as payments are received from the buyer. With the installment-sales method, revenue and cost of goods sold are recognized at the time of sale based on the proportion of the total sales price that each payment represents. The cost-recovery method defers all profit recognition until the costs of the sold goods have been recovered through the buyer's payments.
Relationship Between Cost and Revenue
Understanding the relationship between cost and revenue is crucial in accounting. Explicit costs refer to direct payments made to others in the course of running a business, such as wages, rent, and materials. Implicit costs, on the other hand, represent the opportunity costs of using resources owned by the business that could have been employed elsewhere. The recognition of revenue and the matching of costs to that revenue are important for accurately reporting a business's financial performance.