Accounting Standard-9

Revenue Recognition
REVENUE RECOGNITION
Revenue is the gross inflow of cash, receivables or other consideration
arising in the course of the ordinary activities of an enterprise from the
Sale of goods
Rendering of services and
Use by others, of enterprise resources, yielding interest, royalties and
dividends.

Recognition - Process of recording and reporting an item as an

element of financial statement
 Principles
The revenue recognition principle provides that revenue is
recognized:

o when it is earned, and

o when it is realized or realizable

• Revenue is earned when the earnings process is substantially

complete
• Revenue is realized when goods and services are exchanged for
cash or claims to cash
• Revenue is realizable when assets received are convertible into
a known amount of cash
 Four Types of Revenue Transactions

Revenue from selling products is recognized at the date of sale (date of delivery).

Revenue from services is recognized when services are performed and are billable
.
Revenue from the use of enterprise’s assets by others is recognized as time
passes or as the assets are used up.

Revenue from disposal of assets (other than inventory) is recognized at the point
of sale as gain or loss.
Revenue Recognition Classified by
Nature of Transaction
Revenue Recognition at Point of Sale

Revenues from manufacturing and selling are commonly recognized at point

of sale.

Exceptions:
1. Sales with buyback agreements
2. Sales when right of return exists (high rates that are not reliably
estimable)
3. Trade loading/channel stuffing
Revenue Recognition Before Delivery

Revenue may be recognized before delivery under certain circumstances

Long-term construction contracts are a notable example

Two methods available are :

 The percentage-of-completion method, and
 The completed contract method
Revenue Recognition After Delivery

Revenue recognition is deferred when collection

of sales price is not reasonably assured and no
reliable estimates can be made.

The two methods that are used are:

the installment sales method

the cost recovery method
If cash is received prior to delivery, the method used is
the deposit method.