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Revenue Recognition (Realisation) Concept

  • The concept of revenue recognition requires that the revenue for a business transaction should be included in the accounting records only when it is realised.
  • Here arises two questions in mind.
  • First, is termed as revenue and the other, when the revenue is realised.
  • Revenue is the gross inflow of cash arising from

(i) the sale of goods and services by an enterprise; and

(ii) use by others of the enterprise’s resources yielding interest, royalties and dividends.

  • Secondly, revenue is assumed to be realised when a legal right to receive it arises, i.e. the point of time when goods have been sold or service has been rendered.
  • Thus, credit sales are treated as revenue on the day sales are made and not when money is received from the buyer.
  • As for the income such as rent, commission, interest, etc. these are recongnised on a time basis.
  • For example, rent for the month of March 2017, even if received in April 2017, will be taken into the profit and loss account of the financial year ending March 31, 2017 and not into financial year beginning with April 2017. Similarly, if interest for April 2017 is received in advance in March 2017, it will be taken to the profit and loss account of the financial year ending March 2018. There are some exceptions to this general rule of revenue recognition. In case of contracts like construction work, which take long time, say 2-3 years to complete, proportionate amount of revenue, based on the part of contract completed by the end of the period is treated as realised. Similarly, when goods are sold on hire purchase, the amount collected in installments is treated as realised.

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