What is Revenue Recognition
Revenue recognition is a principle that determines when and how a company will include it in its financial statements. This principle is used so that financial statements provide accurate and reliable information to users regarding a company’s financial performance.
Revenue according to this principle is to be included when
Services or Goods Delivered: Once services are provided or goods are delivered, control over them is transferred to the customer.
Price Agreed Ho: The agreed price has been determined, or the price can be reasonably estimated.
Collectibility Is Assured: Before recognizing revenue, collectibility is ensured, i.e. payment is assured.
Identify the contract with a customer (Foundation)
What is a Contract
- Agreement: created enforceable rights and obligations
- both parties agree to the contract
- contract does not have to be in writing
- Written (helpful)
- Implied (self-check)
- Oral
- Customary (when inventory reaches a certain level)
The contract should have 5 Criteria
- Commercial substance
- Protective clause not to inflate revenue
- actual business and not shuffling papers. business sense or economic substance
- Both parties Approved the contract
- To be legally enforcement
- Not termination clause.
- payment identify (not specific)
- Enough information to determine the price or estimate
- Identify Rights to goods and services
- what am I getting for the service
- collectability
- Otherwise charity
- cash basis if your customer is suspectable
What is performance obligation?
- Promise to provide a product or service to a customer
- company must provide a distinct product or service to the customer
- when a customer can benefit from a good or service on its own or
- together with other readily available resources
- typically, the company sells the product on a standalone basis (separately)
- don’t have to integrate with other goods and services
- Not interdependent
- does your competitors sell it separately?
What is the revenue recognition principle?
The Revenue Recognition Principle is a fundamental accounting principle that specifies when and how revenue should be recognized in accounting records. This principle is very important because it makes financial statements accurate and reliable.
According to this principle, revenue is recognized when it has been earned and its collection is reasonably assured. This principle is an important part of Generally Accepted Accounting Principles (GAAP)
To summarize the Revenue Recognition Principle, these points are important:
Earned Revenue: Revenue is recognized when the associated goods or services have been delivered or performed. This means that the product has been delivered to the customer or the service has been provided.
Measurable: Revenue can be quantified, meaning its amount can be accurately determined.
Collection Assured: Before recognizing revenue, its collection must be reasonably assured. This means that there should be sufficient assurance from the customer’s side for payment
What is Ind as for revenue recognition?
Under Ind AS (Indian Accounting Standards), “Ind AS 115: Revenue from Contracts with Customers” is applied to regulate Revenue Recognition. This standard incorporates globally accepted revenue recognition principles and is applicable in India.
According to Ind AS 115, the process of revenue recognition occurs through the following steps:
Identify the Contract with the Customer: First of all, the company has to identify whether a contract is with the customer. It is important to understand the terms and conditions of the contract, including payment terms, delivery terms, and other commitments.
Identify the Performance Obligations: The goods or services specified in the contract have to be identified as performance obligations. If there are multiple obligations in the contract, they are identified separately.
Determine the Transaction Price: The transaction price has to be determined, which is specified on the basis of the contract. If there is uncertainty about the transaction price, a reasonable estimate is made.
Allocate the Transaction Price: If the contract has multiple performance obligations, the transaction price is allocated among them based on their relative standalone selling prices.
Recognize Revenue: Revenue is recognized when performance obligations are fulfilled. This means that goods have been delivered or services have been provided, and control has been transferred to the customer.
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