Final answer:
Continuing franchise fees are recorded by the franchisor as revenue when earned and receivable from the franchisee, following the revenue recognition principle of accrual accounting, which is consistent with GAAP standards.
Step-by-step explanation:
Continuing franchise fees should be recorded by the franchisor as revenue when earned and receivable from the franchisee. This accounting treatment aligns with the accrual basis of accounting, which recognizes revenue when it is earned, not necessarily when cash is received. The revenue from these fees represents ongoing payments that the franchisee is required to make for the right to continue operating under the franchisor's brand and to receive ongoing support.
It is important to note that the collection of initial franchise fees, which are separate from continuing franchise fees, may have different accounting treatments based on the specific terms and conditions of the franchise agreement. However, for continuing fees, such as royalties, the franchisor should recognize them as revenue in accordance with the revenue recognition principle.
The revenue recognition principle is a cornerstone of the generally accepted accounting principles (GAAP), which are followed in the United States and serve as a common set of accounting rules and standards for financial reporting.