Question

When should revenue be recognized? are there exceptions to the general rule?​

Answer 1

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The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period  in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. There are some exceptions to this general rule of revenue recognition. In case of contracts like construction work, which take long time, say 2-3 years to complete, proportionate amount of revenue, based on the part of contract completed by the end of the period is treated as realised. Similarly, when goods are sold on hire purchase, the amount collected in installments is treated as realised.

Answer 2

Question :

When should revenue be recognized? are there exceptions to the general rule?

Answer:

Revenue should be recognised when sales take place either in cash or credit and/or right to receive income from any source is established.

Revenue is not recognised, in case, if the income or payment is received in advance or the payment is actually received from the debtors. In a nutshell, revenue will be recognised when the right to receive income is established. For example, Mr. A sold goods in January and received payment in February; then revenue is considered to be recognised in the month of January and not in February. However, if Mr A received cash in advance, i.e. in December and goods are sold in January, then the revenue is recognised in January and not in December.

The exceptions to this rule are given below.

1) Hire purchase− When goods are sold on hire-purchase system , the amount received in instalments is treated as revenue.

2) Long term construction contract− The long term projects like construction of dams, highways, etc. have long gestation period. Income is recognised on proportionate basis of work certified and not on the completion of contract.