Question

Q.5 (a) What do you mean by Revenue Recognition Concept ? Describe in Details.​

Answer 1

Answer:

Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and determines how to account for it. Typically, revenue is recognized when a critical event has occurred, and the dollar amount is easily measurable to the company

Explanation:

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Answer 2

ANSWER :

❖ Revenue Recognition Concept :-

Revenue Recognition Concept deals with the recognition of revenue. Revenue Recognition Concept helps in ascertaining the amount and time of recognising the revenues from the ordinary business activities. This concept tells the procedure of determining the income and expense for incorporation in profit and loss account which is also called Revenue Statement. This concept is applied in combination with Cost Principle and Matching Principle. Revenue Recognition Concept known as Revenue Realisation Principle.

• ❒ In the first step of Revenue Recognition Concept, the revenue is to be recognised and it is done only when it is earned. While recognising a particular income care must be taken as to whether it can be recognised as revenue or not. The central operation or the normal activity of a firm is not to sale fixed assets. Therefore, it cannot be recognised as revenue under Revenue Recognition Concept. This Concept applicable in the case of loss on sale of fixed assets.

• ❒ The next step of the process of recognising revenue under Revenue Recognition Concept is consideration of timing of recognition; i.e., when to recognise the revenue. Revenue is recognised at the point of sale, when title of the goods passes to the seller from the buyer. It usually happens on the date of delivery. Again, in case of service, revenue is recognised at the time when it is performed to the satisfaction of the customer and the customer become liable to pay for it.

❖ Example of Revenue Recognition :-

• ❍ In a firm, the cash sales is Rs. 50000 and the credit sales is Rs. 40000. At the time of recognition of revenue under Revenue Recognition Concept, both the cash and credit sales will be recognised as revenue; since, a "sale" implies that transfer of title to the goods is completed whatever it is in cash or on Credit.

• ❍ M/S Sharma Enterprise order on 20-3-2020 from a customer to supply goods of Rs. 50000 which was executed on 31-03-2020. Books of accounts are closed on 31st March each year. M/S Sharma Enterprise received the payment for the goods was as follows : Rs. 40000 by an account payee cheque dated 20-03-2020, Rs. 5000 cash on 31-03-2020 and Rs. 5000 cash on 10-04-2020. In this case, during the accounting year 2019-20, revenue will be recognized at Rs. 50000, since sale is completed within the accounting year; i.e., before 31st March,2020. Although the part of the payment was received in the next accounting year.