Revenue Recognition | Business Income | AS-9 | Financial Accounting Notes | B.Com 1st Sem | CBCS Pattern

  Financial Accounting Notes
Measurement of Business Income
B.Com 1st Sem CBCS Pattern

Unit – 2: Business Income

Part B: Revenue Recognition

Accounting Standard – 9: Revenue Recognition

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, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends. In other words, revenue is charge made to customers/clients for goods supplied and services rendered. Accounting Standard 9 deals with the bases for recognition of revenue in the Statement of Profit and Loss of an enterprise but this standard does not deal with the following aspects of revenue recognition to which special considerations apply:

(i) Revenue arising from construction contracts;

(ii) Revenue arising from hire-purchase, lease agreements;

(iii) Revenue arising from government grants and other similar subsidies;

(iv) Revenue of insurance companies arising from insurance contracts.

Examples of items not included within the definition of “revenue” for the purpose of this Standard are:

(i) Appreciation in the value of fixed assets;

(ii) Unrealised holding gains resulting from the change in value of current assets

(iii) Realised or unrealised gains resulting from changes in foreign exchange rates.

(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;

(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.

Timing of Revenue Recognition: Revenue from sale or rendering of services should be recognized at the time of sale or rendering of services. But in case of uncertainty of collection of the revenue, the revenue recognition is postponed and in such cases revenue should be recognized only when it becomes reasonably certain that ultimate collection will be made.

Conditions to recognised revenue in various cases:

a) Revenue from Sale of Goods: Revenue is recognized when all the following conditions are fulfilled:

a)      Seller has transferred the ownership of goods to buyer for a price.

b)      All significant risks and rewards of ownership have been transferred to buyer.

c)       Seller does not retain any effective control of ownership on the transferred goods

d)      There is no significant uncertainty in collection of the amount of consideration.

b) Sale on Approval: Revenue should be recognized when buyer confirms his desire to buy such goods through communication.

c) Guaranteed Sales: Revenue should be recognized as per the substance of the agreement of sale or after the reasonable period has expired.

d) Warranty Sales: Revenue should be recognized immediately but the provision should be made to cover unexpired warranty.

e) Consignment Sales: Revenue should be recognized only when the goods are sold to third party.

f) Special Order and Shipments: Revenue from such sales should be recognized when the goods are identified and ready for delivery.

f) Installment Sales: Revenue of sales price excluding interest should be recognized on the date of sale. Interest should be recognized proportionately to the unpaid balance.

Revenue from Rendering of Services: Revenue from rendering of service is generally recognized as the service is performed. The performance of service is measured by following two methods:

(i) Completed Service Contract Method: Completed service contract method is a method of accounting which recognises revenue in the Statement of Profit and Loss only when the rendering of services under a contract is completed or substantially completed.

(ii) Proportionate Completion Method: Proportionate completion method is a method of accounting which recognises revenue in the Statement of Profit and Loss proportionately with the degree of completion of services under a contract.