Unit of Competence Module Title LG Code: TTLM Code: Learning Guide

Training, Teaching and Learning Materials
ACCOUNTS AND BUDGET SUPPORT LEVEL III
NEFAS SILK POLY TECHNIC COLLEGE
Learning Guide
Unit of CompetencePrepare, Match and Process Receipts
Module TitlePreparing, Matching and Processing Receipts
LG Code: BUF ACB3 06 0812
TTLM Code: BUF ACB3M 06 0812
TTLM Development Manual Date: November ,2020

Compiled by: Accounting and Business department 1
INTRODUCTION
Welcome to the module “Prepare, Match and Process Receipts”. This learner’s
guide was prepared to help you achieve the required competence in “Accounts and
Budget Support Level III”. This will be the source of information for you to acquire
knowledge attitude and skills in this particular occupation with minimum supervision
or help from your trainer.
Summary of Learning Outcomes
After completing this learning guide, you should be able to:

Lo1:- Receive, identify and record receipts
Lo2:- Match receipts to documentation
Lo3:- Enter data to systems
Lo4:- File documentation
How to Use this TTLM
o Read through the Learning Guide carefully. It is divided into sections that
cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each
section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask
your trainer to show you the correct way to do things or talk to more
experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.

Lo1:- Receive, identify and record receipts
Information Sheet ONE

INTRODUCTION
Matching principle
During the early stage of accounting development, accounting viewed the balance sheet as the
principal financial statement. The emphasis has changed to the income statement as users of the
financial statements have become more concerned with the results of business operations than with
financial position. The determination of periodic net income is two-fold problem involving revenue
recognition and cost(expense) allocation (recognition). It is, thus, a problem of matching revenues
and expenses; the residual amount being net income or not loss for the period.
The total expense involved in obtaining revenue of a given period must be matched against or
deducted from the revenues of the same period for the periodic income determination.
‘’Let the expenses follow the revenues’’
‘‘Efforts (expenses) be matched with accomplishments (revenues)’’.
Expenses are matched against revenues on the basis of three principles.

a) Associating cause and effect relationship (direct relationship)
Example: cost of goods sold have a direct association with sales.
b) Systematic or rational allocation method:
Example: - Depreciation expense on plant assets
- Amortization expense on intangible assets
- Determination of expenses from prepayments
- Allowance/bad debts) expense on doubtful accounts
c) Immediate Recognition:
Period costs such as selling and marketing expenses and general and administrative expenses
must be immediately recognized when incurred.
The measurement of periodic income of a business enterprise is the most objective of the accounting
process. Accountants measure in come for an accounting period by matching expired costs with
realized revenues under a system of accrual accounting. This process requires workable standards for
recognition of revenues, expenses, gains and losses applicable to each period.
The Financial Accounting Standards Board(FASB) described accrual basis of accounting as follows.

‘’Accrual accounting uses, accrual- deferral and allocation procedures whose goal is to relate
revenues, expenses, gains and losses to periods to reflect an enterprise’s performance during a period
instead of merely listing its cash receipts and outlays’’. Thus recognition of revenues, expenses, gains
and losses and the related increments or decrements in assets and liabilities including matching of
revenues and costs, allocation and amortization is the essence of using accrual accounting to measure
performance of business enterprise.
Recognition of Revenues and Gains

Recognition of Revenues:
In today’s more complex and uncertain business environment accountants are faced with two
tasks relating to revenue. These are:
- to determine when revenue is realized.
- the amount at which revenue is recognized.
Before undertaking the discussion of revenue realization and recognition, let us first define the
following terms.
Revenue: The Financial Accounting Standards Board(FASB) has defined revenue as the inflow or
other inhancement of a business enterprise’s assets or settlements of its liabilities (or a combination
of both) during an accounting period from delivering of goods, rendering of services or other
activities that constitute the interprise’s ongoing major operations.
Realization: In the measurement of revenue, realization generally means that a measurable

transaction (such as a sale) or an event (such as rendering of services) has been completed or is
successfully finalized to warrant the recording earned revenue in the accounting records.
Revenue recognition: The process of formally recording revenue in the accounting records is called
revenue recognition.
Before revenue is recognized, it must be realized and measured with sufficient reliability;
thus, only realized and measurable revenue appears in a business enterprises income statement.
Earning process:- The profit directed activities of a business enterprise through which revenue is
earned is known as the earning process. Such activities include: purchasing, manufacturing, selling,
rendering services, delivering and servicing products sold, etc.
In general, revenue is the measurable value of goods and services that a business enterprise
transfers to its customers and clients and realization refers to the timing of revenue recognition.
Revenue has been earned as a result of the enterprise’s profit directed activities. Each step in the
earning process is essential to the earning of revenue.
Today, accountants face a more difficult problem than ever before in determining when a ‘’sale’’ has
taken place and when a ‘’service’’ has been substancially performed. In the following sections we
will discuss and illustrate the various stages of the earning process at which revenue may be
recognized (recorded).

I. Revenue recognized at the time of sale and delivery

In actual business situations, the most widely accepted evidence of revenue realization is the
sale and delivery of a product or the performance of a service.
There is little question about the reliability of an evidence.
One may question why accountants choose so late a stage in the earning process to recognize
revenue? The answer comes in two parts:
a) At any point prior to sale, the expected selling price of a product and the ability to sale it at a
profit may be so uncertain that they do not constitute sufficient evidence to justify the valuation
of the product, and
b) for most business enterprises the actual sale of a product is the most important step in the
earning process.
In general until a sale is made and the product is delivered to and accepted by customers, the
future stream of revenue is both uncertain and unearned.
Even when a sale occurs, the recognition of revenue may be delayed because of unusual terms
surrounding the sales transaction. Example, some companies may be given the right to return
products sold and delivered to them if they cannot resell the products or are found unfeet for the
purpose they are intended for.
When such a right of return exists, revenue is recognized on the date of sale only if all of the
following conditions are met.
a) The seller’s price to the buyer is fixed or determinable on the date of sale.
b) The buyer has paid the seller, or is obligated to pay and the obligation is not contingent on
resale of the product.
c) The buyer’s obligation to the seller would not be changed in the event of theft or physical
damage of the product.
d) When the buyer has economic substance apart from that provided by the seller (i.e., when the
buyer has his own significant risk and benefit of ownership).
e) The seller does not have significant obligations for future performance to bring about the
resale of the product by the buyer.
f) The amount of future returns can be reasonably estimated.
If these conditions are met and sales are recorded, provision for any lost that may be expected in connection with any return is made on the date of
sale.
a) Provision for estimate of future returns is made at the time of sale.

b) Sales revenues and cost of goods sold reported in the income statement should exclude the
portion of estimated future returns.
c) The allowance provided for doubtful accounts is deducted from the accounts receivable.
When buyers have the right to return products if they are unable to resell the products, the sellers are exposed to continued risks of ownership
because of the return. In such the cases the seller has the following options.
a) Not recording the revenue (sale) or postponing the sales revenue until the return privillage is
expired.
b) Recording the sales revenue, but reducing the sale by the estimated future returns.
c) Recording the sales revenue and accounting for the returns as they occur in the future periods.
This is actually the usual option that sellers use.

Even though the completion of a sale has been widely accepted to the recognition of revenue,
“sale and delivery” and “revenue recognition” are not necessary synonymous. Sale and delivery is
one point of the revenue recognition, and which is actually the main point.
In some situations accountants may record revenue at other stages of the earning process such
as “before or after” the delivery of the product. These and other revenue recognition situations are
discussed in the following sections.
II. Revenue Recognition Before Delivery

We have seen that revenue must be realized before it is recognized in the accounting records.
Generally realization does not occur unless a sale has taken place. However, in some cases
revenue is considered realized before the product is delivered to customers because a sale and a
significant portion of the earnings process (i.e, performance by the seller) have taken place.
Although performance by the seller is not completed, the amount of the partial performance
may be both economically relevant and measurable. Under such circumstances, the postponement of
revenue recognition until delivery of the product would be overly conservative and would assign the
entire profit on the sale to the period in which delivery is made. This may result in shifting of income
among periods.
When a sale occurs but is not considered to result in revenue realization, at what stage in the
productive(earning) process might revenue be recognized?
Possible answers to this question are:

a) prior to production b) during production, and
c) on completion of production
a) Prior to production: An agreement to enter in an exchange of property on a future

date is a contract to sell not a contract of sale in which property rights are
exchanged. Neither a contract to sell nor a contract of sale without performance by
the seller is a transaction that signals the realization of revenue.
However, contracts to sell and contracts of sale in advance are common in many
companies. For example, motion pictures, agricultural products, fashion goods,
recorded music and computer products may be ‘’ presold’’ for future delivery. Such
transactions should be entered in the accounting records in memorandum form.
Megazine subscriptions, insurance premiums, rents and other fees for most
services may be received in advance of production or performance of the goods and
services. Amounts received by the sellers of such goods or services represent
deferred revenues (liabilities) until delivery or performance takes place.

III. Revenue Recognition during Production

When revenue is generated from large projects such as the constraction of a dam, a road or a
bridge that requires two or more years to complete, production is the major element in the
earning process.
The contract for such a project generally specifies a fixed price, and completion of the “sale” is
dependent only on the satisfactory performance by the contractor. If the revenue on such a contract
were to be recognized only on completion of the project, a distorted pattern of net income may result
for the years the project was in progress.
There are commonly used accounting method for revenue recognition during production. This is the
percentage-of –completion method.
Percentage-of –completion method

Under the percentage-of-completion method of accounting for construction type contracts, revenue is
recognized based on the amount of work (production) completed each year.
This method is widely used by construction companies that require considerable time or
several years to complete the project.
Under this method revenue is recognized each period during the life of the project(contract) in
propertion to the amount of the contract that has been completed during the period.
Percentage completed or extent of progress towards completion can be determined by either the input
or output measures.
A. Input measures:
Input measures use input to production activity to measure percentage completed. There are
two input measures. There are:
a) Cost-to-cost method: compares the actual cost incurred to date with the estimated total cost of the
contract to measure the percentage completed.
Actual cos t incurred to date
Percentage of work completed= Total estimated most recent cost
b) Efforts-Expended Method: Compares the actual work performed to date with the total estimated
work to be performed on the contract.
actual labour hours inccured to date
Percentage of work completed= Total estimated labour to perform
B. Output measures: uses results achieved to date compared with the total expected results of the
contract to measure the percentage of completion.
Actual work performed to date
Percentage of work completed= total work to be completed
Example:Arefayne and his families company is engaged in the construction of buildings. Arefayne
and his families company had enter a contract in March 1-1995 with Sheba College to build a college
that takes 3 –years to complete and the construction was expected to be completed in October 1997.

The contract price, actual costs incurred, estimated costs to complete the building, collections made
by the construction company from Sheba College and other necessary data are given below.
- Contract price of the building (agreed price) ---------------------7,000,000birr
-Expected (estimated) cost to complete the building --------------5,000,000 birr
1995 1996 1997
-Actual costs incurred in birr 1,000,000 1,860,000 3,140,000
-Estimated cost to complete the
remaining building(most recent cost) 4,000,000 2,640,000 ___
- Partial billings to Sheba college 800,000 3,500,000 2,700,000

-Actual collections from Sheba 500,000 3,300,000 3,200,000
Arefayne and his families company uses cost-to-cost method to calculate the percentage of work
completed in the determination of revenues and gross profits.
Required:
1. Determine the revenue and the gross profit to be recognized for each of the three years.
2. Make the necessary journal entries by the construction company for the three years to record the
transactions relating to the construction of the college.
The following are the steps required under the cost-to-cost method
Step1. Determine the actual construction cost incurred to date from the given records.
Step2. Estimate the remaining cost required to complete the building. This is the most recent
estimated cost of the contract when compared with the 5,000,000 original estimation
Most recent estimated = cost incurred + Remained cost to complete the

total cost of the contact to date remaining work
Step3. Determine the percentage of work completed using the following formula
cost incurred to− date

Percentage of work completed= most recent estimate of the total cost
The solution is give below
Revenue is defined as inflow of assets (settlement of liabilities) during an accounting period from
delivering or producing goods, rendering services, or other activities that constitute the enterprise's

ongoing major or central operations. It results in increases in cash, receivables, etc. In other words, it
is the measurable value of goods and services that a business enterprise transfers to its customers and
clients.
Lo2:- Match receipts to documentation
RECOGNITION OF REVENUES
Revenue recognition is identified as one of the basic elements of the conceptual framework for which
two issues are related to it:
(i) When should revenue be realized and recognized in the accounting records? And
(ii) The dollar amount at which it is recognized
In today' s business environment, the recognition of revenue is important as new and complex
business transactions, along with many new products and services have developed in recent years.
This resulted with a challenge to develop appropriate revenue recognition procedures in a way that
prevent (creativity' in the revenue recognition procedures and income manipulation.
When to Recognize Revenues?
Revenue is recognized at a specific stage of the earning process; when all .of the following three
revenue realization conditions are met:
i) Sufficient reliable evidence exists to measure the market value of output;

This is evidenced by exchange transaction between independent parties. The economic substance of
the transaction indicates that an exchange has occurred and mere legal form of an exchange doesn't
support revenue realization.
ii) The earning process is complete or virtually complete and all necessary costs; have been incurred
or may be estimated with reasonable accuracy;
iii) Collection of claims from customers is reasonably assured.


Solution:
1995 1996 1997

I. Total contract price (agreed price) in birr (a) 7,000,000 7,000,000
7,000,000
II. Less: Estimated cost:
- Actual cost incurred to date(b)------------------------------------ 1,000,000 2,860,000 6,000,000
- Estimated cost to complete the remaining work(c) ------------- 4,000,000 2,640,000 0
- Most recent estimated total cost of the contract (d) (btc)------ 5,000,000 5,500,000 6,000,000
III. Equals  Estimated gross profit from the contract (a-d) (e)----- 2,000,000 1,500,000 1,000,000
IV. Percentage of work completed (b/d) (f) ---------------------------- 1,000,000 2,860,000 6,000,000
5,000,000 5,500,000 6,000,000
20% 52% 100%

V. Revenue recognized to date (ax f) (g) -------------------------------- 1,400,000 3,640,000 7,000,000
VI. Revenue recognized in prior years (h) ----------------------------- 0 (1,400,000)(3,640,000)
VII. Revenue for the current period (g-h) (I) -------------------------- 1,400,000 2,240, 000 3,360,00
Actual cost for the current period----------------------------------(1,000,000) (1,860,000) (3,140,000)
VIII Gross profit (current year revenue- actual cost of current year) -- 400,000 380, 000 220,000
Total gross profit = (400,000+ 380,000 + 220,000) = 1,000,000
OR
Ix . Gross profit recognized to date (e x f) (J) ------------------------------- 400,000 780,000 1,000,000
X. Gross profit recognized prior year (k) ------------------------------------ (0) (400,000) (780,000)
XI. Gross profit for the current year ( ) = (J-K)= -------------------------- 400,000 380,000 220,000

1. Journal Entries:
The necessary journal entries in connection with the construction of the building are given
below.
1995 1996 1997
a) Entry to record the actual construction costs:
Construction in progress (CIP) 1,000,000 1,860,000 3,140,00
Cash (Accounts payable) 100,000 1,860,000 0
3,140,0
00
b) Entry to record partial billings:
Accounts receivable -Sheba 800,000 3,500,000 2,700,00
Partial billings 800,000 3,500,000 0
2,700,00
0
c) Entry to record cash collections:
Cash 500,000 3,300,000 3,200,00
Accounts receivable –Sheba 500,000 3,300,000 0
3,200,
000
d) Entry to record revenue and gross profit:
Construction costs 1,000,000 1,860,000 3,140,00
Construction in progress (profit) 400,000 380,000 0
Revenue from construction 1,400,000 2,240,000 220,000
3,360,00
0
The “partial billings account” is used to accumulate partial progress billings to a customer.
It is a contra construction in progress account
Costs must continue to be accumulated in the ‘’construction-in-progress’’ account to

maintain a record of
a) Costs incurred plus
b) Recognized profits

Partial billings
CIP
1995 800,000 1995-cost 1,000,000
-profit 400,000
1996- 3,500,000 1996 – cost 1,860,000
- profit 380,000
1997- 2,700,000 1997- cost 3,140,000
- profit 220,000
Total 7,000,000 Total 7,000,000
The inventory cost shown in the ‘’construction-in-progress’’ account cannot be removed until the
construction is completed and transferred to the new owner.
To record the final approval of the contract by the customer upon completion of the contract and up
on transfer of the construction the following journal entry is required.
Partial billings ------------------------------7,000,000
Construction in progress----------------7,000,000
The ‘’construction cost’’ account is used to accumulate the actual construction cost incurred. It is a
temporary account and is reported in the income statement. This account is similar to cost of goods
sold’’ account in the merchandise business.
Financial statement presentation under the percentage of completion method is as follows:

b) presentation of income statement
Arefayne and His Families Company
partial income statement
for the year ended
1995
1996 1997
Revenue from construction -------------1,400,002,240,000 3,360,000
Less: Construction costs ----------------(1,000,000) (1,860,000)
(3,140,000)
Gross profit ------------------------- 400,000 380,000 220,000
Operating expenses incurred are not debited to the construction in –progress account. Rather they
are debited(charged) to an appropriate expense account in the period incurred and are closed to an
income summary account at year end.
b) Presentation of balance sheet:

The partial billings account is a contra construction in progress account and therefore the
partial billings account is reported in the balance sheet as off set against the construction-in-
progress.
If the balance in the construction –in-progress account to date is greater than the balance in the
partial billings account to date the excess amount is reported in the balance sheet as inventory under
the current assets section entitled “costs and recognized profits not yet billed”. Or as “costs and
recognized profits in excess of billings.”
If the balance in the construction-in-progress to date is less than the balance in the partial
billings to date the excess is reported in the balance sheet as current liabilities entitled as ‘’partial
billings in excess of costs and recognized profits.’’
Accounts receivable = partial billings - Collections

for a given period to date to date
A/R for 1995 = 800,000 – 500,000= 300,000

A/R for 1996 = 4,300,000 –3,800,000= 500,000
A/R for 1997 = 7,000,000 – 7,000,000= 0
Where 4,300,000 = 800,000 + 3,500,000
3,800,000= 500,000 + 3,300,000
For 1995 cost and recognized profit in excess of billings = 1,400,000-800,000= 600,000 =
Inventory
For 1996 –billings in excess of cost and recognized profit= 4,300,000-3,640,000 = 660,000=
Liability
Where 4,300,000 partial billings to the date of 1996 = 800,000 for 1995 + 3,500,000 for 1996
3,640,000=
construction-in-progress till 1996= 1,000,000 + 400,000 + 1,860,000+380,000
Where 1,000,000and 400,000 are cost and profit of 1995 and 1,860,000 and 380,000 are cost and
profit for 1996
The presentation of the balance sheet for Arefayne and his families company is given below.

partial balance sheet
on December: 1995 1996 1997
Current Assets
Accounts receivable -------------------------------300,000 500,000 0
Inventories (costs in excess of billings)---------600,000 0

Current Liabilities
A/P (Billings in excess of costs) ---------------- 660,000 0
Note:-Receivables for the year 1997 is zero because the total billings are collected in the life of the
construction
 There is no billings in excess of costs and profits for the year 1996 because construction in
progress to date is less than partial billings to date.
 There are no recognized costs and profits for 1995 because construction –in-progress to date is
greater than partial billings.
 There are no either costs and recognized profits in excess of partial billings or partial billings in
excess of recognized costs and profits because the two accounts are equal in magnitude (i.e.,
7,000,000 each)
 Expected cost to complete the building has no effect in the calculations.
III. Revenue recognition on completion of production (Completed contract method):

In some instances the recognition of revenue is delayed until production is completed even
though a contract of a sale had occurred earlier. This method is also called completed contract
method. Under this method, revenue is recognized when the project is essentially completed. Costs
of long term constructions and current billings are accumulated, but they are not recorded as debits
and credits to costs, profit and revenues.
Example: Assume all data for Arefayne and His Families Company in the example under the
percentage completion method except that, the method now is completed contract method.
Required:
Write the necessary journal entries
1995 1996 1997
a) Entry to record costs: the same the same the same
b) Entry to record partial billings the same the same the same
c) Entry to record collection the same the same the same
d) Entry to record revenues and gross profit no entry no entry two entries
The two entries needed when the construction is completed in the year 1997 are:
1. Entry to recognize revenues and to close the partial billings account is given below
Partial billings ------------------------------------ 7, 000,000
Revenue from construction ---------------- 7,000,000
Where the 7,000,000 is the partial billings of $800,000 + 3,500,000 + 2,700,000
2. Entry to record construction costs and to close the construction in progress account is given
below
Construction costs -------------------------6,000,000
Construction- in-progress ----------------------6,000,000(with out profit)
Where 6,000,000 = 1,000,000+1,860,000 +3,140,000 actual costs incurred in the years 1995, 1996
and 1997
The Total gross profit of the contract is recognized in the year 1997 is $1,000,000 as is noted in the
following partial income statement.

partial income statement
for the year ended 1995 1996 1997
Revenue from constructions ---------------------- 0 0 7,000,000
Construction costs --------------------------------- 0 0 (6,000,000)
Gross Profit ---------------------------------------- 0 0 1,000,000
The presentation of the balance sheet is given below

partial balance sheet
Dec-31 1995 1996 1997
Current Assets
Accounts receivables -----------------------------300,000 500,000 0
Inventories
Construction – in-progress ----------------------1,000,000
Less-partial billings ------------------------------ (800,000) 0
Costs in-excess of billings ----------------------- 200,000
Current Liabilities
Partial billings to date --------------------------- 4,300,000
Less-construction-in-progress to date -------- (2,860,000)
Excess of billings over related costs -----------_____ 1,440,000
0
Note:
Construction-in-progress is only 1,000,000 for the year 1995 not 1,400,000 because profit under
this method is recognized at the end of the life of the work
Lo3:- Enter data to systems
Accounting for Long Term Construction Losses

When the estimated future cost of a contact indicates a loss, the total expected loss on the entire
contract should be recognized under both the percentage of completion contract method and the
completed contract method.
This is consistent with the accounting convention of conservatism which requires the anticipation of
foreseeable losses so as to avoid overstating current and future income as well as asset value.
Two types of losses can be identified. These are:

a) loss in a certain period for a profitable contract, and
b) loss on unprofitable contact.
A) Loss in a certain period for a profitable contract

If increase in estimated future cost of one period brings a loss in that period, but eliminate
the total profit of the contract, the loss is recognized in the period in which it is incurred.
Example: Assume all data for Arefayne and His Families Company which was given earlier except
that the estimated cost to complete the construction in the year 1996 was birr 3,640,000 instead of
birr 2,640,00 and the actual cost in the year 1997 was birr 3,640,000 instead of birr 3,140,000
Required:
1. Calculate the loss to be recognized in the year 1996.
2. Write the necessary journal entries to record the loss.

Solution:
1995 1996 1997
I) Total contract price(agreed price) in birr for the year (a) -----------7,000,000 7,000,000 7,000,000
II) Actual costs incurred in birr for the year (b) -------------------------1,000,000 1,860,000 3,640,000
III) Actual cost incurred to date (C) --------------------------------------1,000,000 2,860,000 6,500,000
IV) Estimated cost to complete the remaining work (d) ---------------4,000,000 3,640,000 0
V) Most recent estimated total cost of the contract (e) =(c+d)--------5,000,000 6,500,000 6,500,000
VI) Percentage of work completed(f) = (c/e) --------------------------- 1,000,000 6,500,000 6,500,000
5,000,000 6,500,000 6,500,000
= 20% 44% 100%
VII) Revenue recognized to date (g) = (a x f) ---------------------------1,400,000 3,080,000 7,000,000
VIII) Revenue recognized in prior years (h) --------------------------- 0 1,400,000 3,080,000
IX) Revenue for the current year (I) = (g-h) ---------------------------1,400,000 1,680,000 3,920,000
X) Actual cost for the year (b) -------------------------------------------1,000,000 1,860,000 3,640,000
XI) Gross profit or loss for the current year (I-b) --------------------- 400,000 (180,000) 280,000
Total gross profit of the period = 400,000-180,000+280,000 = 500,000 or
Total profit on the contruct = Total contruct price –Total actual cost
= 7,000,000 –(1,000,000 + 1,860,000 + 3,640,000)
= 7,000,000 – 6,500,000
= 500,000

2. Journal Entries:
The necessary journal entries in connection with the data given above are given below:
A) Entry to record the actual costs: 1995 1996 1997

Construction in progress ---------------1,000,000 1,860,000 3,640,000
Cash/Accounts payable/ ---------- 1,000,000 1,860,000 3,640,000
B) Entry to record partial billings:
Accounts receivable ---------------------800,000 3,500,000 2,700,000
Partial billings --------------------- 800,000 3,500,000 2,700,00
C) Entry to record cash collection:
Cash ------------------------------------- 5,000,000 3,300,000 3,200,000
Accounts receivable ---------------- 500,000 3,300,000 3,200,000
D) Entry to record revenues and gross profits:
Construction costs---------------------- 1,000,000
Construction-in-progress(profit) --------400,000
Revenue from construction --------1,400,000
Construction costs -------------------------------------- 1,860,000
Construction revenue --------------------------------1,680,000
Construction in progress(loss) ----------------------- 180,000
Construction costs -----------------------------------------------------3,640,000
Construction –in-progress(profit) -------------------------------------280,000
Revenue from construction ------------------------------------------ 3,920,000
Note: Under the completed contract method, no loss is recognized in the year 1996 because the
contract is still expecting a profit that will be recognized in the year of completion. This is so
because an over all effect of the operation is profit and the loss observed in the year of 1996
would off set against the profits in the year 1995 and 1997.
B) Loss on unprofitable contract:

In this case, the estimated future contract cost at the end of the period may indicate that on
overall loss on the contract is expected.
The entire expected contract loss must be recorded in the current period.
Example: Assume all data in the previous example except that the expected cost to complete the
contract in 1996 was birr 4,290,000 in stead of birr 2,640,000 and the actual costs for the year
1997 was birr 4,290,000 instead of birr 3,140,000.
Required:
1. Calculate the loss that has to be recognized in 1996.
2. Write the necessary journal entries.

Solution:
1995 1996 1997
Actual costs incurred in the year of (a) --------------------------------1,000,000 1,860,000 4,290,000
Actual costs incurred to date(b) ---------------------------------------1,000,000 2,860,000 7,150,000
Estimated cost to complete the project (c) ---------------------------4,000,000 4,290,000 0
Total estimated Cost (d) (b+c)------------------------------------------ 5,000,000 7,150,000 7,150,000
Percentage of work completed (e)= b/d ----------------------------- 1,000,000 2,860,000 7,150,000
5,000,000 7,150,000 7,150,000
= 20% 40% 100%
Total contract price (f) ----------------------------------------------- 7,000,000 7,000,000 7,000,000
Revenue to date (g) = (e x f) ----------------------------------------- 1,400,000 2,800,000 7,000,0000
Revenue recognized in prior year (h) ------------------------------ (0) (1,400,000) (2,800,000)
Revenue for the current period (g-h) --------------------------------- 1,400,000 1, 400,000 4,200,000
Construction costs -----------------------------------------------------1,000,000 1,950,000 4,200,000
Gross profit (loss) ----------------------------------------------------- 400,000 (550,000) ____

Where:
1) Construction cost for 1996 = Revenue of 1996 + overall loss of the project + reversal of
revenue of 1995
= 1,400,000 + 150,000 + 400,000
= 1,950,000
2) Overall loss of the project = overall revenue (contract price) – Total actual contract cost
= 7,000,000-( 1,000,000 + 1,860,000 + 4,290,000)
= 7,000,000 – 7,150,000
= 150,000
3) Construction cost for 1997 = Cost to date –cost of the prior years
= 7,150,000 – (1,000,000 + 1,950 ,000)
= 7,150,000 – 2,950,000
= 4,200,000
N.B. The actual construction cost of 1996 is not only $ 1,860,000 but it also absorves the profit
of 1995
1995 1996 1997
2) Journal entries
Construction in progress ----------- --1,000,000 1,850,000 4,200,000
Various accounts (cash or A/P) ----- 1,000,000 1,850,000 4,200,000
b) Accounts receivable ------------------800,000 3,500,000 2,700,000
Partial billings ----------------------- 800,000 3,500,000 2,700,000
c) Cash -------------------------------------500,000 3,300,000 3,200,000
Accounts receivable ----------------- 500,000 3,300,000 3,200,000
d) Construction costs ---------1,000,000
Construction in progress --- 400,000 1995
Construction revenue ---------1,400,000
Construction costs ------------1,950,000
Construction –in-progress ------550,000 1996
Construction revenue ------------1,400,000
Construction costs -------------------4,200,000 1997
Construction revenue ------------4,200,000
Conditions that must be met to use the percentage of completion method are:
1) Dependable estimates can be made of the extent of progress towards completion; contract
revenues and contract costs.
2) The contract clearly specifies the enforceable rights regarded goods and services to be
provided and received by the parties.
3) The buyer can be expected to satisfy obligations under the contract.
4) The contractor can be expected to perform the contractual obligation.

Compiled by Accounting and Business department
Lo4:- File documentation
The completed contract method should be used only:

1. an entity has primarily short term contract.
2. the conditions for using the percentage completion method are not met.
3. there are enherent uncertainties in the contract beyond the normal business risks for
which reasonably dependable estimates can not be made.
IV. Revenue Recognition After delivery
As stated in the preceding section, the most widely accepted method of revenue realization is the
sale and delivery of products or the performance of services. However in the case of product
sales, revenue recognition may be delayed until some stage in the earning process subsequent to
sale and delivery because the sale and delivery may not provide sufficient evidence of revenue
realization.
If the collectability of the receivable from the sale is highly uncertain and if there is no
reliable basis for estimating the degree of collectability, then revenue recognition is delayed or
deferred until cash is collected.
In such conditions, revenue may be recorded under the:
i. installment method,
ii. cost recovery method,
iii. cash collection method, or
iv. other revenue recognition methods.
i) Installment method:
Business enterprises that sell goods on the installment plan may use the installment
method of accounting only when accrual accounting is not considered appropriate. The
installment method is widely used for income tax purposes because it postpones the payment of
the income tax until installment receivables are collected. However the installment method is not
acceptable for financial accounting unless considerable doubt exists as to the collectibility of the
receivables and a reasonable estimate of doubtful accounts expense can not be made.
Under the installment sales contract the customer:

 signs the contract,
 makes a small down payment at the point of sale, and
 agrees to make periodic payments over an extended period of time.
To protect the seller(the contractor) from risk of loss from uncollectible accounts:
a) The seller retains legal title to the items sold during the payment period until the amount is
fully paid. This is called conditional contract. There are two things here:
- the contractor/seller/ retains legal title and
- the buyer enjoys using the items during the payment period, but not sell them
b) The item sold is secured by a mortgage note
If the buyer defaults on one or more payments, the seller can reposes (take back) the items
sold.

Under the installment method the seller recognizes gross profit on installment sales in
proportion to the cash collected. If the rate of gross profit on installment sales is 40%, each dollar
of cash collected on the installment receivables represents 40 cents of gross profit and 60 cents of
cost recovery.
The following are the necessary steps to recognize the gross profit under the installment
sales.
1. Maintaining separate records for installment sales transactions (i.e., maintain records for
sales, cost of goods sold and collections in the regular manner).
2. At the end of each accounting period:
a) calculate the gross profit rate on the installment sales using the following formula.
Gross profit on installment sales
Gross profit rate= installment sales
b) make closing entries to reverse the installment sales and cost of the installment sales
and to recognize deferred gross profit.
c) recognize a portion of the deferred gross profit as realized gross profit for the year
using the following formula.
Realized gross profit= cash collected x gross profit rate
Example:
The following data belongs to ‘’OMEDAD’’ private limited company for its merchandise sold
on installment sales for the years 1995 , 1996 and 1997
1995 1996 1997
Installment sales (a) -------------------------------- -------$400,000 450,000 440,000
Installment cost of goods sold (b)------------------------- 280,000 319,500 286,000
Deferred gross profit on installment sales (c)= (a-b)----120,000 130,000 154,000
Cash receipts on installment;
Cash receipts from sale of 1995(d) ------------------------140,000 180,000 80,000
Cash receipts from sale of 1996 (e) ----------------------- 190,000 170,000
Cash receipts from sale of 1997(f) ------------------------ 240,000
Other credit of noninstallmentsales(g)-------------------- 500,000 400,000 530,000
Other noninstallment cost of goods sold (h)----------- 422,000 275,000 441,500
Operating expenses (i) ------------------------------------- 38,000 56,000 52,000
Required
Make the necessary journal entries for the installment sales transactions for the three
years assuming that the tax levied on OMEDAD is 55% and OMEDAD uses perpetual inventory
system.
Note: under the perpetual inventory system, there are two necessary journal entries each time a
sale is made. These are:

a) entry to record the sales transaction and

b) entry to record the cost of goods sold.
Solution:
1. Entries for 1995.
a) Entry to record sales on installment
Installment accounts receivable ----------------------400,000
Installment sales ----------------------------------------400,000
b) Entry to record installment cost of goods sold
Cost of goods sold on installment bases ----------------------280,000
Merchandise inventory -------------------------------------- 280,000
c) Entry to record collection of cash on installment sales
Cash -------------------------------------140,000
Installment account receivable ----------------140,000
d) Entry to close installment sales, cost of goods sold on instalment sales and deferred gross
profit
Installment sales --------------------------400,000
Cost of goods on installment sales ---------------- 280,000
Deferred gross profit --------------------------------120,000
From this, gross profit rate = installment sales
120,000
= 400,000 = 30%
Realized gross profit= cash collected x gross profit rate
= 140,000 x 30%
= 42,000
e) Entry to remove the realized gross profit from the deferred gross profits
Deferred gross profit -------------------------------42,000
Realized gross profit ----------------------------42,000
f) Entry to close realized gross profit
Realized gross profit --------------------------------42,000
Income summary -------------------------------42,000
g) Entry to record other credit sales
Accounts receivable --------------------------------500,000
Sales --------------------------------------------500,000
h) Entry to record other CGS
Cost of goods sold -------------------------------422,000
Merchandise inventory ---------------------------422,000
i) Entry to record operating expense
Operating expenses --------------------------------38,000
Cash/accounts payable/ ---------------------- 38,000
J) Entry to close sales
Sales ------------------------------------------500,000
Income summary ------------------------500,000
k) Entry to close cost of goods sold
Income summary -----------------------------422,000

Cost of goods sold ----------------------- 422,000
l) Entry to close operating expenses
Income summary -----------------------------38,000
Operating expenses -----------------------38,000
Note
The gross profit of 1995 is $ 120,000; but this gross profit is not realized in 1995. According to
the installment method, even though it is known that the gross profit is 120,000, it must be
recognized piece by piece as a percentage of cash collections. We deduct the realized profit from
the total profit to get the amount of profit to be deferred to the future.
Amount of profit to be deferred for profit of 1995= total profit of 1995 –profit realized as a
percentage of cash collection:
= 120,000 – 42,000 = 78,000
The presentation of the income statement for OMEDAD for 1995 is given below
OMEDAD PLt. Co
Income statement
for the year ended 1995
Sales ----------------------------------------------------------------------------500,000
Cost of goods sold ------------------------------------------------------------(422,000)
Gross profit from regular sales (other sales)------------------------------- 78,000
Add: Realized gross profit on installment sales --------------------------- 42,000
Total gross profit for 1995 --------------------------------------------------- 120,000
Less: Operating expenses --------------------------------------------------- (38,000)
Operating income ---------------------------------------------------- 82,000
Less: Income tax (55%-given) ---------------------------------------------- (45,100)
Net income ------------------------------------------------------------ 36,900
Note: The realized gross profit on the installment sales of $ 42,000 is shown separately from the
gross profit on other sales.
- If installment sales transactions are insignificant parts of the total sales, it is satisfactory to
include only the realized gross profit on the installment sales in the income statement as a
special item.
- If the installment sales transactions represent a significant (large) part of the other total sales,
full disclosure of installment sales, cost of installments and any expense allocable to
installment sales is needed.
2. Entries for 1996:

a) Entry to record sales on installments:
Installment accounts receivables -----------------------------450,000
Installment sales ------------------------------------------450,000
b) Entry to record installment cost of goods sold:
Cost of installment sales ---------------------------319,500
Merchandise inventory ----------------------------319,500

c) Entry to record collection of cash:
Cash ---------------------------------------------------370,000
Installment accounts receivables of 1995 ------------180,000
Installment accounts receivables of 1996 ------------190,000
d) Entry to close installment sales, cost of installments and deferred profits:
Installment sales ------------------------------------450,000
Cost of installment sales -------------------------319,500
Deferred gross profit of 1996 --------------------130,500
Gross profit Rate = Installment sales
130,500
= 450,000 = 29%
Gross profit realized in 1996 = gross profit realized from + gross profit realized from
collection of sales 1995 collection of sales of 1996
= 180,000 x 30% + 190,000 x 29%

= 54,000 + 55,100
= 109, 100
e) Entry to remove the realized gross profit from the deferred gross profit:
Deferred gross profit of 1995 -------------------------54,000
Deferred gross profit of 1996 ------------------------55,100
Realized gross profit on installments ------------109,100.00
f) Entry to close realized gross profit:
Realized gross profit -----------------------------------109,100.00
Income summary ---------------------------------109,100.00
g) Entry to record other sales:
Sales ---------------------------------------------------400,000
Income summary ------------------------------------400,000
h) Entry to record cost of installments:
Income summary ---------------------------------275,000
Cost of installments --------------------------275,000
i) Entry to close operating expenses:
Income summary -----------------------------------56,000
Operating expenses --------------------------56,000
The income statement presentation for OMEDAD Pvt. Ltd. Co for 1996 is given below
OMEDAD Pvt. Ltd. Company
income statement
Regular sales -----------------------------------------------------------------400,000
Cost of merchandise sold ---------------------------------------------------(275,500)
Gross profit from regular sales --------------------------------------------- 124,500
Add: Realized gross profit on installment sales -------------------------- 109,100
Total gross profit for 1996 -------------------------------------------------- 233,600

Less: Operating expenses --------------------------------------------------- (56,000)
Operating income ------------------------------------------------------------ 1 77,600
Less: Income tax (55%) ------------------------------------------------------ (97,680)
Net income ----------------------------------------------------------- 79,920
3) Entries for 1997:

a) Entry to record installment sales:
Installment accounts receivable -----------------------------440,000
Installment sales ---------------------------------------------440,000
b) Entry to record cost of installments:
Cost of installment sales --------------------------------------------286,000
Merchandise inventory -----------------------------------------286,000
c) Entry to record collection of cash:
Cash --------------------------------------490,000
Installment accounts receivable – 1995
--------------80,000
Installment accounts receivable –
1996--------------170,000
Installment accounts receivable – 1997--------------240,000
d) Entry to close installment sales, cost of installment and deferred profits:
Installment sales -------------------------------440,000
Cost of instalment sales
--------------------------------286,000
Deferred gross profit
-----------------------------------154,000
e) Entry to realize gross profit from collection of cash:
1st calculate gross profit rate for 1997
Gross profit rate for 1997= Gross profit on installment sales = 154,000 = 35%
Instalment sales
440,000
Realized gross profit on cash collection for sale of 1995= 80,000x 30%= 24,000
Realized gross profit on cash collection for sale of 1996= 170 x 29% = 49,000
Realized gross profit on cash collection for sale of 1997= 240,000 x 35%= 84,000
Entry – Deferred gross profit of 1995--------------------------24,000

Deferred gross profit of 1996---------------------------49,000
Deferred gross profit of 1997----------------------------84,000
Realized gross profit ------------------------------------------------157,300
f) entry to close realized gross profit:
Realized gross profit ---------------------------------------157,000

Income summary
----------------------------------------157,000
g) Entry to record other credit sales:
Accounts receivable ---------------------------------------------530,000
Sales ---------------------------------------------------------------530,000
h) Entry to record other cost of merchandise sold:
Cost of merchandise sold -----------------------------------441,500
Merchandise inventory
---------------------------------441,000
i) Entry to close operating expenses:
Income summary ---------------------------------------------52,000
Operating expenses
--------------------------------------------52,000
OMEDAD Pvt. Ltd. Co

income statement
Sales (Regular) -------------------------------------------------------530,000
Cost of merchandise sold (Regular) -------------------------------(441,500)
Regular gross profit ------------------------------------------------- 88,500
Add: Realized gross profit in 1997 ---------------------------------------157,300
Total gross profit ----------------------------------------------------245,800
Less: operating expenses -------------------------------------------------(52,000)
Operating income--------------------------------------------------193,800
Less: Income tax (55%)---------------------------------------------------(106,590)
Net income --------------------------------------------------------- 87,210
Interest on installment contracts

It is common for the seller to charge the buyer interest on the unpaid balance. Each installment
payment consists of interest and principal. The interest revenue should be accounted separately.
Defaults and repossessions

The seller can repossess merchandise sold under an installment arrangement if the purchaser fails
to meet payment requirements.
When the seller repossesses the item, the repossessed merchandise is recorded at its estimated
current market value. The remaining balance on the accounts receivable and on the deferred
gross profit must be eliminated. Any loss or gain on repossession must be recognized(recorded).
Loss or gain on repossession is computed as follows
Balance on A/R--------------------------------------------xxxxxxx
Less: Deferred Gross profit -------------------------------------- xxx
Unrecovered cost ------------------------------------------ xxxxx
Less: Estimated fair market value ------------------------------- (xxx)
Gain or loss on realization -------------------------------- xxx

Note: If the fair market value of the item repossessed is greater than the unrecovered cost, the
difference is gain, otherwise, loss.
To illustrate assume the following data for OMEDAD Pvt. Ltd. Company
On January 1-1995 OMEDAD Pvt. Ltd. Company sold office equipment having the cost of
140,000 at 200,000 to Sheba College and Sheba College has paid cash of 20,000 as a down
payment on the date of sale and agreed to pay the remaining balance in three yearly equal
installments on December 31- of each year. Assume further that OMEDAD uses perpetual
inventory system.
Required:
Make the necessary journal entries by OMEDAD Pvt. Ltd Co.
a) Entry to record the sale (January 1-1995) by OMEDAD:

Cash -----------------------------------------------------20,000
Installment accounts receivable ---------------------180,000
Installment sales --------------------------------------------200,000
b) Entry to record cost of merchandise sold (January 1-1995):
Cost of installment sales -----------------------------140,000
Merchandise inventory ------------------------------140,000
c) Entry to record the collection of the 1st installment:
1st calculate the regular installment
Re maining installment sale
Yearly regular installment = years
$180,000
= 60 ,000 year
= 3 years
Entry Cash ----------------------------------------------------60,000

Installment receivables -------------------------------60,000
d) Entry to close installment sales cost of installments and deferred gross profit:
Installment sales ---------------------------200,000
Cost of installments -----------------------------140,000
Deferred gross profit –1995 ------------------- 60,000
e) Entry to record realized gross profit and to close it:
Gross profit 60 ,000
= = 30%
1st gross profit rate for 1995 = Sales 200 ,000
This gross profit rate is the same for all the years
Total cash collection in 1995 = down payment + Collection of installment
on January 1 On Dec. 31
= 20,000 + 60,000
= 80,000
Realized gross profit= (cash collections) x gross profit rate

= $ 80,000 x 30%
= 24,000
Entry: Deferred gross profits ------------------------------24,000
Realized gross profit ------------------------------------24,000
Realized profit ---------------------------24,000 closing entry
Income summary----------------------24,000
f) Entry to record the collection of the 2nd installment (dec-31-1996):

Cash --------------------------------------60,000
Installment accounts receivable -------------------60,000
g) Entry to record realized gross profit (Dec-31-1996) and to close it
Realized gross profit = Cash collected x gross profit rate
= 60,000 x 30%
= 18,000
Entry Deferred gross profit -----------------------18,000

Realized gross profit --------------------18,000
Realized gross profit ---------------------18,000
Income summary ------------------------------18,000
h) Assume that Sheba College has defaulted to pay the remaining installment and on March 1-
1998 OMEDAD has repossessed the office equipment from Sheba College. The estimated
fair market value of the equipment was 40,000.
Required:
Write the necessary journal entry:
1st Determine gain or loss
Balance on installment accounts receivable ----------------------------60,000
Less: Deferred gross profit(30%) ----------------------------------------(18,000)
Unrecovered cost --------------------------------------------------42,000
Less: Fair market value ---------------------------------------------------(40,000)
Loss on repossession -------------------------------------------- 2000
NB. If uncovered cost is greater than fair market value, it is loss.

Entry: Merchandise inventory (repossessed) -------------------40,000
Deferred gross profit --------------------------------------18,000
Loss on repossession --------------------------------------2,000
Installment accounts receivable -------------------------60,000
ii. Cost Recovery Method

The cost recovery method may be used to account for revenue transactions when the
terms of such transactions are ambiguous or the financial position of customers is so unstable to
evaluate the collectibility of the related receivables.
Under the cost recovery method, no profit is recognized until the cost of the products sold
is fully recovered (that is, not profit is realized until cash receipts by the seller exceeds the
seller’s cost of merchandise sold).
Here 1) sales, cost of merchandise sold and cash collections are recorded in the regular manner.
2. Closing entry is made at the end of the period to deferred unrealized gross profit.
3. Adjusting entry is made to recognize gross profit in a period (periods) after cost is fully
covered.
To illustrate, assume that on January 1-1995, Mesfin Industrial Engineering sales
merchandise with a cost of 250,000 to Fresuat Industrial Share Company on credit basis with
receivables of birr 180,000, 120,000 and 60,000 at the end of Dec 1995, 1996 and 1997
respectively.
Required:
Make the necessary journal entries under the cost recovery method in each of the three years.
Note: Total credit sale= 180,000 + 120,000 + 60,000 = birr 360,000
Solution:
Entries in 1995
A) entry to record sales on installment (January 1-1995)
Installment accounts receivable ----------------------------360,000
Installment sales --------------------------------------360,000
B) Entry to record cost of merchandise sold on installment (Jan 1-1995)
Cost of installment sales ----------------------------250,000
Merchandise inventory ------------------------------250,000
C) Entry to record cash collections in Dec-1995
Cash ---------------------------------------------180,000
Installment account receivables -----------------180,000
D) Entry to close installment sales cost of installment and deferred gross profit:
Installment sales -------------------------------------360,000
Cost of installment sales ----------------------------------250,000
Deferred gross profit ---------------------------------------110,000
Note: Since cost is not yet covered, there is no entry to recognize gross profit in the year 1995
Entries in 1996
A) entry to record cash collections in Dec 1996
Cash -----------------------------------------------------------120,000
Installment accounts receivables -------------------------120,000
B) Entry to recognize gross profit
1st Determine amount in excess of cost as follows
Amount of cash collected in 1995 -----------------------180,000
Amount of cash collected in 1996 -----------------------120,000
Total Amount of cash collected till Dec 1996 ----------300,000
Less: Cost of merchandise sold -------------------------(250,000)

Realized gross profit in 1996 -----------------------------------50,000
Entry Deferred gross profit ------------------------50,000

Realized gross profit -------------------------------50,000
Realized gross profit ----------------50,000 entry to close
Income summary -----------------------50,000 realized gross profit
Entries in 1997
A) Entry to record collection of cash in Dec 1997
Cash -----------------------------------------------60,000
Installment accounts receivable -----------------------60,000
B) Entry to recognize gross profit:
Deferred gross profit -----------------------------60,000
Realized gross profit -----------------------------------60,000
C) Entry to close realized profit (Dec-31-1997)
Realized gross profit -------------------------------60,000
Income summary ---------------------------------60,000
iii. Cash collection method
The recognition of revenue may be delayed beyond the point of sale until additional evidence
confirms the sales transaction because a significant degree of uncertainty may exist as to the
collectibility of the receivables resulting, from credit sales transactions or a sales transaction may
be lacking in economic substance and therefore may offer inadequate evidence of revenue
realization.
Under these circumstances revenue is recognized as cash is collected and costs incurred are
either recognized as expenses or deferred as considered appropriate in a specific situation.
An extreme application of this test of revenue realization is the cash basis of accounting. The
cash basis accounting calls for the recognition of revenue only when cash is received and for the
recognition of expenses only when cash is paid.
Revenue recognition under the installment and cost recovery methods of accounting is based to a
considerable extent on the timing of cash receipts.
iv. Other Revenue Recognition Situations

Financial statements issued by companies engaged in leasing, real estate development, banking,
franchising, motion picture distribution, network television programming, the assembly of
computers and mobile homes and other new industries that have new way of structuring business
transactions have focused on creative approaches on the recognition of revenue.
The following are some other revenue recognition situations.

a) Revenue from service transactions:

Enterprises operating in service industries sale services, perform acts, agrees to perform
acts in a later date or permit their resources to be used by others. These revenue generating
activities are called service transactions.
Generally, revenue is recognized from a service transaction when the provider has performed.
Performance consists of the completion of a specified act or acts.
The following four methods of revenue recognition for service transactions have been suggested.
- Specific performance method
- Completed performance method
- Proportional performance method and
- Cash collection method
b) Revenue from franchise sales
In the early years of the franchising industry, it was common practice for the franchisor to
recognize revenue at the time it sold the franchise to a franchisee.
c) Revenue from sales-type leases:

When a lease contract meets the criteria of a sales-type lease, the lease is recorded by the
lessor as a sale and the entire consideration received is recognized as revenue at the time the
lease becomes effective. The consideration received generally consists of the present value of the
monthly payments to be made by the lessee over the term of the lease.
Note: Savings and cost offsets are not revenue. Purchase discounts, and other cost savings should
not be confused with revenue.
Discounts available on purchases are reductions in the cost of the items purchased, not revenues.
Cost savings are potential outflows of cash that a business enterprise is able to avoid not source
of revenue.
3.1.2. Recognition of Gains

Gain may be defined as increases in a business enterprise’s owners’ equity from incidental
transaction and from all other transactions and events except those that result from revenue or
investments by owner.
Gains from the disposal of assets are recognized in the accounting period in which the related
transactions are considered to have resulted in the completion of the earning process.
The recognition of gains must pass a more severe test than the recognition of losses because of
the influence of the concept of conservatism. Except in few cases, gains must be realized before
they are recognized.



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Training, Teaching and Learning Materials

ACCOUNTS AND BUDGET SUPPORT LEVEL III

NEFAS SILK POLY TECHNIC COLLEGE

TTLM Code: BUF ACB3M 06 0812

TTLM Development Manual Date: November ,2020

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

How to Use this TTLM

TTLM Development Manual Date: November ,2020

Lo1:- Receive, identify and record receipts

Information Sheet ONE

Expenses are matched against revenues on the basis of three principles.

TTLM Development Manual Date: November ,2020

Recognition of Revenues and Gains

Realization: In the measurement of revenue, realization generally means that a measurable

TTLM Development Manual Date: November ,2020

I. Revenue recognized at the time of sale and delivery

a) Provision for estimate of future returns is made at the time of sale.

TTLM Development Manual Date: November ,2020

II. Revenue Recognition Before Delivery

Possible answers to this question are:

a) Prior to production: An agreement to enter in an exchange of property on a future

TTLM Development Manual Date: November ,2020

III. Revenue Recognition during Production

Percentage-of –completion method

TTLM Development Manual Date: November ,2020

- Partial billings to Sheba college 800,000 3,500,000 2,700,000

Most recent estimated = cost incurred + Remained cost to complete the

cost incurred to− date

The solution is give below

TTLM Development Manual Date: November ,2020

Lo2:- Match receipts to documentation

When to Recognize Revenues?

i) Sufficient reliable evidence exists to measure the market value of output;

TTLM Development Manual Date: November ,2020

TTLM Development Manual Date: November ,2020

1995 1996 1997

5,000,000 5,500,000 6,000,000

20% 52% 100%

TTLM Development Manual Date: November ,2020

Costs must continue to be accumulated in the ‘’construction-in-progress’’ account to

TTLM Development Manual Date: November ,2020

Financial statement presentation under the percentage of completion method is as follows:

b) Presentation of balance sheet:

TTLM Development Manual Date: November ,2020

Accounts receivable = partial billings - Collections

A/R for 1995 = 800,000 – 500,000= 300,000

Arefayne and His Families Company

TTLM Development Manual Date: November ,2020

III. Revenue recognition on completion of production (Completed contract method):

Arefayne and His Families Company

The presentation of the balance sheet is given below

Lo3:- Enter data to systems

Accounting for Long Term Construction Losses

Two types of losses can be identified. These are:

A) Loss in a certain period for a profitable contract

TTLM Development Manual Date: November ,2020

TTLM Development Manual Date: November ,2020

A) Entry to record the actual costs: 1995 1996 1997

B) Loss on unprofitable contract:

TTLM Development Manual Date: November ,2020

TTLM Development Manual Date: November ,2020