Final answer:
A franchisor must account for continuing franchise fees by recognizing them as revenue over the term of the franchise agreement, and for routine sales of equipment and supplies as revenue at the point of sale. To calculate accounting profit, total expenses are subtracted from sales revenue; for example, $1 million in sales revenue with $950,000 in expenses results in a profit of $50,000.
Step-by-step explanation:
A franchisor should account for continuing franchise fees on an accrual basis, recognizing revenue as they are earned over the term of the franchise agreement. This is in accordance with the matching principle, which states that expenses should be matched with the revenues they help to generate. Thus, if a franchisor provides ongoing services or support to the franchisee, the franchise fees that are related to these services should be recognized over the period during which the service is provided.
For the routine sales of equipment and supplies to franchisees, the franchisor should recognize revenue at the point of sale when control of the goods transfers to the franchisee, under the generally accepted accounting principles (GAAP). At this point, the franchisor has completed their part of the sales transaction and has no further obligations concerning those goods.
To calculate a firm's accounting profit, we would subtract the total expenses of labor, capital, and materials from the sales revenue. So, for a firm with $1 million in sales revenue and $950,000 in total expenses (the sum of $600,000 on labor, $150,000 on capital, and $200,000 on materials), the accounting profit would be $50,000.