Cost Recovery Method

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Description of Cost Recovery Method. Explanation.

Definition Cost Recovery Method. Description

The Cost Recovery Method is one of several Revenue Recognition approaches under U.S. GAAP, in which revenue is recognized subsequently to the sale.

When collections on installment sales occur over an extended period and no reasonable basis for estimating collectability exists, U.S. GAAP allows companies to use the cost recovery method for recognizing profits on such sales.

Under this method, no profit is recognized until cash collections from the buyer exceed the seller's cost of goods sold. After the cost of the merchandise has been recovered, any cash collected in excess of this amount is recorded as recognized gross profit in the seller's income statement.

For example, if a company sold a machine worth $20,000 for $30,000, it can start recognizing profit only after the buyer has paid more than $20,000.

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