Revenue Recognition

REVENUE RECOGNITION

Group MembersBhavna Atul Ritwik Dipesh Mitali Rajendra Prashant Anuj

What is revenue? • Revenue means the gross inflow of cash, receivable arising in the course of normal activities of a business from sale of goods, from rendering of services & from the use by others of the resources of the business yielding interest, royalties and dividends. What revenue does not include? • Revenue arising from construction contracts. • Revenue arising from government grants and similar subsidies. • Natural increases in herds and agricultural products.

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Changes in foreign exchange rates. Discharge of an obligation of less than carrying amount.

What is revenue recogniton? • Revenue recognition principle is an important accounting principle, which is the main difference between cash basis accounting and accrual basis accounting. In cash basis accounting revenues are simply recognized when cash is received no matter when and how the services were performed or goods delivered. In accrual basis accounting revenues are recognized when they are (1) realized or realizable and (2) earned no matter when cash is received.

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This statement was issued by ICAI in the year 1985 & in the initial years it was recommendatory for only a few enterprises but was made mandatory for enterprises in india from april 01 1993. For revenue to be recognized, there are two key conditions that must be met according to SFAC 5, they are: • Assurance of payment: in order to book revenue, the company must be able to estimate the probability that it will be paid for the order.

2. Completion of the earnings process Under this test, the seller must have no significant remaining obligation to the customer. If an order for five hundred football helmets has been placed and only two hundred delivered, the transaction is not complete. Likewise, if the seller is the manufacturer of appliances and promises extensive warranty coverage, it should not book the sale as revenue unless the cost of providing that service (i.e., warranty repair labor and parts) can be reasonably estimated. Additionally, a company that sells a product with an unconditional return policy cannot book the sale until the window has expired (e.g., a company that promises unrestricted returns for cash until ninety days after the sale should not record the revenue until that period has elapsed.)

A broad category of revenue flows into three groups. They are: 2. Revenue from sale of goodsthe transfer of property of goods in most cases results or in coincides with the transfer of significant risks and rewards of ownership to the buyer. However this may not be the case always. Take an example where delivery has been delayed.

2. Use of enterprise resources used by othersrevenue flowing from such group would be in the form of : Interest, Royalties Dividends.

3. Revenue earned from rendering services A. Completed service contract method performance in a service contract may consist of (i) one single act (ii) or more than one act where services are not performed are significant enough in relation to all transactions.Under this, performance is not deemed complete and the service is not chargeable unless all the transactions are completed. Revenue is recognised only if the above are met.

B. Proportionate completion method It recognises revenue in the statement of profit and loss with the degree of completion of services under a contract. Here performance consists of the execution of more than one act.

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