Final answer:
A company recognizes contract assets and liabilities when certain criteria are met.
Step-by-step explanation:
In accounting, a contract asset is recognized when a company has performed under a contract but hasn't yet billed the customer. A contract liability, on the other hand, is recognized when a company has received payment from the customer but hasn't yet performed under the contract. These assets and liabilities are not recognized until they meet certain criteria.
Specifically, a company does not recognize contract assets or liabilities until it has determined that it has enforceable rights, the performance obligation has been satisfied, the consideration is probable, and the company has the legal right to the consideration.
For example, let's say a construction company has a contract to build a house for a customer. The company has completed the foundation and is ready to bill the customer. At this point, the company would recognize a contract asset for the work it has performed, but has not yet billed the customer for.