Question

Explain the Revenue Recognition Principle and provide a concise presentation of the most recent approaches regarding its content and application. (word limit, 500 words)

Answer 1

Revenue recognition is a process of formally recording revenues in a reporting period. This principle requires that revenue be recognised, when the revenue earning process is complete or virtually complete. Revenue earning process would be regarded as virtually complete when firm sells the product or provides service with assurance of payment by the customer. The realisation principle probably reminds you of the proverb " don't count your chickens before they are hatched". Uncertainty may persist even after sales. Revenue recognistion conditions for Goods & services:

1. Price can be measured reliably

2. The seller will receive cash or other benefits from the transaction

3. The costs incurred & to be incurred for transaction can be measured correctly

4. In case if services, the stage of completion of transaction can be measured reliably

5. In case of goods, the seller has transferred to buyer the significant risk & rewards of ownership

6. The seller does not retain effective control over the goods sold.