Question

Please write a brief memo to PROFESSOR on what it means to recognize revenue. Please keep it brief. I suggest you observe a soft limit of 250 words.

Answer 1

The revenue recognition is basically a Matching principle which is originated due to the adoption of the accrual accounting. In the accrual accounting, we recognize the revenues only in the period when the related expenses are recognized. Here, it does not matter whether cash or payment has been made or received. The principle says that any revenue or sale is only being recognized at the transfer of title or rendering of the services.

In accrual accounting, the revenue is recognized in the two forms ie. Accrued revenue and Deferred revenue. The Accrued revenue comes up when the revenue are recognized and recorded in the books, but before the payment or cash is received ie. on credit basis. While the Deferred revenue is the recognition of the revenues in some future period and after the receipt of cash or payment towards the goods to be supplied or services to be rendered.

Thus, as per IFRS, we can recognize the sale of goods and rendering of services on the following criteria:

a) The proper transfer of the risks and rewards to the buyer from the seller.

b) The seller is on safe side towards the receipt of cash or payment of sale or services.

c) All the titles or control over the sold goods and services are completely surrendered by seller.

d) All the costs of making the revenues or rendering of services can be measured and accounting for.

e) The value of the goods sold and services rendered is reasonably measured, recognized and accounting for.

The recognition of the revenues or services rendered in accrual and cash accounting pattern is totally different. Under the cash accounting, revenues are recognized as soon as the payment or cash towards the revenues or services rendered are received with no consideration fulfilling the obligation of when goods or services are delivered.

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