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Lecture 7 - Revenue Recognition

Revenue is the gross inflow of cash, receivables or other consideration arising from the sale of goods, rendering of services and other sources like interest, royalties and dividends. According to the revenue recognition principle, revenues should be recognized when they are realized and earned, regardless of when cash is received. This means that revenue from the sale of goods is recognized when risks and rewards are transferred to the buyer, and revenue from services is recognized as the services are performed.

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123 views17 pages

Lecture 7 - Revenue Recognition

Revenue is the gross inflow of cash, receivables or other consideration arising from the sale of goods, rendering of services and other sources like interest, royalties and dividends. According to the revenue recognition principle, revenues should be recognized when they are realized and earned, regardless of when cash is received. This means that revenue from the sale of goods is recognized when risks and rewards are transferred to the buyer, and revenue from services is recognized as the services are performed.

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Revenue recognition

AS-9
Learning Outcome

• Recognize the revenue generated from selling


goods and services by an entity
Meaning of Revenue

Revenue is the gross inflow of cash, receivables or


other consideration arising in the course of the ordinary
activities of an enterprise from the sale of goods,
rendering of services & from various other sources like
interest, royalties & dividends
How and when revenue is to
be recognized???
Revenue Recognition Concept
• Revenue recognition is a generally accepted accounting
principle (GAAP) that stipulates.

• The revenue recognition principle using


accrual accounting requires that revenues should
be recognized when it is realized and earned – No matter cash
is received or not.

• This is a key concept in the accrual basis of accounting because


revenue can be recorded without actually being received.
Example
• Bob’s Billiards sells a pool table to bar on December 31 for
$5,000. The pool table was not paid for until January 15th
and it was not delivered to the bar until January 31.

• According to the revenue recognition principle, Bob’s


should not record the sale in December. Even though the
sale was realizable in that the sale for $5,000 was initiated, it
was not earned until January when the pool table was
delivered.
Example
• Johnson and Waldorf, LLC is an accounting firm that
provides tax and consulting work. During December, JW
provides $2,000 of consulting work to one of its clients.
The client does not pay for the consulting time until the
following January. According to the revenue recognition
principle, JW should record the revenue in December
because the revenue was realized and earned in
December even though it was not received until January.
Example
• Pat’s Retail, Inc. sells clothing from its retail outlets. A
customer purchases a shirt on June 15th and pays for it
on a credit card. Pat’s processes the credit card but does
not actually receive the cash until July. The credit card
purchase is treated the same as cash because it is a
claim to cash, so the revenue should be recorded in June
when it was realized and earned.
A) Sale of Goods
• One key element for determining the recognition of
revenue of a transaction involving the sale of goods is
that the seller has transferred the goods to the buyer
for a consideration.

• The transfer of goods results in the transfer of the


significant risks and rewards in ownership of the goods.
B) Rendering of Services

• Revenue recognition of services depends as the service


is performed. This is further divided into two ways:

(a) Proportionate Completion Method


(b) Completed Service Contract Method
• (a) Proportionate Completion Method: This method of
accounting recognizes revenue in the statement of profit &
loss proportionately with the degree of completion of each
service.

• (b) Completed Service Contract Method: This method of


accounting recognizes revenue in the statement of profit &
loss only when the rendering of services under a contract is
completed or substantially completed.
Quiz
What is revenue?
A.The amount of money owed to a business by its
customers
B.The amount spent by a business to sell its goods and
services
C. The amount of money a business earns from selling its
goods and services
D.The cash received from sale of assets
• Which of the following is TRUE about the revenue
recognition principle?
A.A rule that accountants can choose to follow
B.Revenue is recorded when a contract is signed
C.Revenue is recorded when cash is received
D.Revenue must be recorded when it is earned
Use the following information to determine when a
business should record (or recognize) revenue: A contract
was signed in March for legal work completed by a law firm
in April. The client agreed to pay for the completed work in
May and the law firm received payment in early June.
A.March
B.April
C.May
D.June

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