When free servicing is included in the sales price of an item, how should the associated revenue be recognized?

When free servicing is included in the sales price of an item, the associated revenue should be deferred and recognized over the service period. This approach aligns with the revenue recognition principle, which dictates that revenue should be recognized when earned rather than when cash is received.

In this scenario, the inclusion of free servicing means that part of the sales price is allocated to the future service obligation. Given that the service will be provided after the sale, it is essential to match the revenue recognition with the timing of when the service is delivered. By deferring the revenue, the company appropriately reflects the future obligation to provide servicing and ensures that the revenue is recognized over the course of the service period, matching the associated costs and liabilities the company incurs during that time.

This method demonstrates a commitment to providing reliable financial reporting, presenting a clearer picture of the company's obligations and the real-time revenue generation corresponding to the service being rendered.