REVENUE RECOGNITION

Group Members-
Bhavna Atul
Ritwik Dipesh
Mitali Rajendra
Prashant
Anuj
 What is revenue?
• Revenue means the gross inflow of cash,
receivable arising in the course of normal
activities of a business from sale of goods, from
rendering of services & from the use by others of
the resources of the business yielding interest,
royalties and dividends.

What revenue does not include?

• Revenue arising from construction contracts.
• Revenue arising from government grants and
similar subsidies.
• Natural increases in herds and agricultural
products.
• Changes in foreign exchange rates.
• Discharge of an obligation of less than carrying amount.

What is revenue recogniton?

• Revenue recognition principle is an important accounting
principle, which is the main difference between cash
basis accounting and accrual basis accounting. In cash
basis accounting revenues are simply recognized when
cash is received no matter when and how the services
were performed or goods delivered. In accrual basis
accounting revenues are recognized when they are (1)
realized or realizable and (2) earned no matter when
cash is received.
• This statement was issued by ICAI in the
year 1985 & in the initial years it was
recommendatory for only a few
enterprises but was made mandatory for
enterprises in india from april 01 1993.
For revenue to be recognized, there are two
key conditions that must be met
according to SFAC 5, they are:
• Assurance of payment:
in order to book revenue, the company
must be able to estimate the probability
that it will be paid for the order.
2. Completion of the earnings process
Under this test, the seller must have no significant
remaining obligation to the customer. If an order for five
hundred football helmets has been placed and only two
hundred delivered, the transaction is not complete.
Likewise, if the seller is the manufacturer of appliances
and promises extensive warranty coverage, it should not
book the sale as revenue unless the cost of providing
that service (i.e., warranty repair labor and parts) can be
reasonably estimated. Additionally, a company that sells
a product with an unconditional return policy cannot book
the sale until the window has expired (e.g., a company
that promises unrestricted returns for cash until ninety
days after the sale should not record the revenue until
that period has elapsed.)
 A broad category of revenue flows into
three groups. They are:
2. Revenue from sale of goods-
the transfer of property of goods in most
cases results or in coincides with the
transfer of significant risks and rewards
of ownership to the buyer. However this
may not be the case always. Take an
example where delivery has been
delayed.
2. Use of enterprise resources used by
others-
revenue flowing from such group would be
in the form of :
Interest,
Royalties
Dividends.
3. Revenue earned from rendering services
A. Completed service contract method
performance in a service contract may consist of
(i) one single act (ii) or more than one act
where services are not performed are
significant enough in relation to all
transactions.Under this, performance is not
deemed complete and the service is not
chargeable unless all the transactions are
completed. Revenue is recognised only if the
above are met.
B. Proportionate completion method
It recognises revenue in the statement of
profit and loss with the degree of
completion of services under a contract.
Here performance consists of the
execution of more than one act.
Thank You