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REVENUE RECOGNITION

The revenue recognition is the principle of accrual accounting as well as of matching concept.

REVENUES ARE RECOGNISED WHEN THEY ARE

• REALISED

• EARNED

NO matter cash is received or not whereas

In cash accounting system they are realized when cash is received no matter whether goods have been received or not

In case of accrued revenues, revenue is recognized before cash is received

Deferred revenues are recognized after cash is received

Example

Revenue from the sale of asset is immediately recognized at the time of sale

Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied

• The entity has transferred to the buyer the significant risks and rewards of ownership of the goods

• The entity retains neither continuing managerial involvement to the degree usually associated with ownership not effective control over the goods sold

• The amount of revenue can be measured reliably

• It is probable that the economic benefits associated with the transaction will flow to the entity and the cost incurred in respect of the transaction can be measured reliably.

The recognition criteria in this standard are usually applied separately to each transaction. However in certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction e.g when the selling price of product includes an identifiable amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed.

Conversely, the recognition criteria are applied to two or more transaction together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole.

EXAMPLE

An entity may sell goods and, at the same time, enter into separate agreement to the repurchase the goods at a lateral date, thus negating the substantive effect of the transaction, in such a case the two transactions are dealt with together.