ALL ABOUT ACCOUNTING :- 7th BLOG

A.            *****ACCOUNTING*****

Hi freinds 🙏.,

           Today's discuss 2nd accounting principles...

 So let's discuss...

  2. REVENUE RECOGNITION :-

revenue recognition principle definition.:-

The accounting guideline requiring that revenues be shown on the income statement in the period in which they are earned, not in the period when the cash is collected. This is part of the accrual basis of accounting (as opposed to the cash basis of accounting).

 ★ Criteria for revenue recognition :- 

Before revenue is recognized, the following criteria must be met: persuasive evidence of an arrangement must exist; delivery must have occurred or services been rendered; the seller's price to the buyer must be fixed or determinable; and collectability should be reasonably assured.

★ Types of revenue recognition :- 

1. Sales basis method :- 

With the sales basis revenue recognition methods, revenue is recorded at the time of sale. Sale is defined as the period of time where goods and services change hands, which may or may not be at the same time as payment.

For example, if a customer makes payment before they receive delivery of the product, the revenue isn’t recognized until the product is delivered.

2. Percentage of Completion Method :- 

The percentage of completion method for recognizing revenue is typically used in large or long-term projects. Firms that provide construction services, engineering services or other services with long projects are most likely to use this method. Providers of these services need to be able to demonstrate that they are generating revenue even though projects are not yet complete.

3. Completed Contract Method :- 

When the completed contract method is used, revenue is recognized only once the project is complete and the contract is fulfilled. This method applies to both revenue and expenses. The only time this revenue recognition method is used is when the requirements of the percentage of completion method are unable to be met. For example, if a contract is not enforceable or if completion percentage cannot be calculated.

4. Cost Recoverability Method :- 

The cost recoverability method takes a completely different approach to revenue recognition. Rather than recording revenue and offsetting those revenues by expenses, the cost recoverability method does not record any revenue until all of the project costs are accounted for. 

5. Installment Method :- 

When companies cannot rely on their customer’s ability to pay in a timely manner, the installment revenue recognition method may be best suited for the organization. With the installment method, revenue is only recorded once the organization has received payment.

6. Updated Revenue Recognition Method :- 

The standard for revenue recognition was updated in May 2014 with the release of Accounting Standards Update 2014-09 addressing Revenue from Contracts with Customers. While the old standard had rules with different requirements for revenue recognition by industry, the updated standard now has a principled approach to revenue recognition for all organizations.

with the new revenue recognition standards moving forward, companies in all industries will be required to recognize revenue from customer contracts using a five-step model. To assist in the process, Doeren Mayhew has summarized the multi-step process for determining when to recognize revenue below.

1. Identify the contract with a customer.

The achievement of closing a deal is exciting and embarks the journey between company and client, but it will be important to make sure a contract under the new standard is in place. The contract should have approval and commitment by both parties, clearly identified rights of the parties, clear terms of payment, valuable exchange and guaranteed payment.

2. Identify the performance obligations in the contract. With a contract in place, all goods and/or services delivered to the customer will need to be identified. It will need to be specified whether the goods and services in the contract are distinct as individual pieces, or need to be combined with other goods/services until the bundle is recognized as distinct.

3. Determine the transaction price. Once the performance obligations are outlined, the price for carrying out the agreed upon goods and services will need to be distinguished. Companies can determine this price by considering the effects of items such as discount variables, time value of money, economic trends and non-cash financing.

4. Allocate the transaction price to the performance obligations in the contract. Whether the goods and services distinguished in the contract are individual or bundled, a transaction price should be allocated to each separate piece based on what they would sell for separately.

5. Recognize revenue when (or as) the entity satisfies a performance obligation. As soon as the promised goods or services are delivered, the revenue should be recognized. If goods or services are delivered over a period of time, then revenue should be recognized over time.

★IFRS 15 REVENUE RECOGNITION :- 

The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

★ How do you check revenue recognition ?

The two main stages of a revenue audit include testing the revenue accounts on your income statements followed by an examination of your accounts receivable on the balance sheet. The auditors may also check for revenue recognition issues, such as side agreements and channel stuffing.

★Milestone method of revenue recognition:-

Milestone is a method of revenue recognition that recognizes revenue for an activity or project only when a defined milestone (event or condition) has been reached. There is no relationship to cost, unless the milestone is based on percentage of completion.

Milestone revenue can be used with any billing method. The segmentation of the revenue determines where the milestone records are set up. If the milestone revenue is segmented, the milestone records will be set up at the posting level. If the milestone revenue is non-segmented, the milestones will be set up on the contract activity. Milestones are defined manually or in terms of days, dates, or percentages of completion.

* Usage :- 

Use milestone revenue recognition when you want to specify when revenue recognition can occur. The amount recognized is determined manually for each milestone.

Remaining 11 principles of accounting discuss in 8th blog...

      So wait my 8th blog...

    #read_comments_share.

     

                  ______________________________

 * Buy some income tax act books :- 

https://www.amazon.in/gp/product/B081X3Z33T/ref=as_li_qf_asin_il_tl?ie=UTF8&tag=mayurthakare21&creative=24630&linkCode=as2&creativeASIN=B081X3Z33T&linkId=d07f15677e03bc6f99e141a23d61eccb

* Buy some printing bill calculators with

 tax :-

https://www.amazon.in/gp/product/B07CYCTXPJ/ref=as_li_qf_asin_il_tl?ie=UTF8&tag=mayurthakare-21&creative=24630&linkCode=as2&creativeASIN=B07CYCTXPJ&linkId=5f5755a5d662e464acab3ad74d86c543

* Buy some accounting finance related 

books:- 

https://www.amazon.in/gp/search/ref=as_li_qf_sp_sr_il_tl?ie=UTF8&tag=mayurthakare-21&keywords=Finance&index=aps&camp=3638&creative=24630&linkCode=xm2&linkId=1ec73ab103c9d619c512516e8800d1cb

* Buy some revenue recognition books :- 

https://www.amazon.in/gp/search/ref=as_li_qf_sp_sr_il_tl?ie=UTF8&tag=mayurthakare-21&keywords=Revenuerecognition&index=aps&camp=3638&creative=24630&linkCode=xm2&linkId=9b90ab802d54a94e7b5f903792a55657

                               ★★★★★