Professional Documents
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Slides: 14
AS-9 weblink
Deals with
Timing of revenue
recognition of revenue in
the form of
the sale of goods
the rendering of services
the use by others of
enterprise resources
yielding
Interest
Royalties
dividends
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Revenue Recognition
Revenue Recognition
Definitions
Revenue
gross inflow of cash, receivables or other consideration
arising in the course of the ordinary activities of an enterprise
from the sale of goods, from the rendering of services, and from the use by
others of enterprise resources yielding interest, royalties and dividends
measured by the charges made to customers or clients
In an agency relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration.
Completed service contract method
a method of accounting which recognises revenue in the statement of profit
and loss only when the rendering of services under a contract is completed or
substantially completed.
Proportionate completion method
a method of accounting which recognises revenue in the statement of profit
and loss proportionately with the degree of completion of services under a
contract.
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Revenue Recognition
Revenue Recognition
Sale of goods
When risk and rewards are transferred
Exception: under forward contract/government guarantee with
negligible risk of failure to sell
Rendering of services
Proportionate completion method when service consists of more than
one act. Recognition may be straight line or dependent on pattern of
performance.
Completed service contract method when service consists of a single
act or when final act is very significant.
Interest on time basis dependent on amount outstanding and
applicable rates
Royalties as per the relevant agreement
Dividends only after right to receive payment is established
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Revenue Recognition
Uncertainty in revenue
recognition
Recognise revenue only if ultimate collection
reasonably certain
If not reasonably certain postpone recognition till
it becomes reasonably certain
If uncertainty arises after sale provide for it (e.g.
bad debts)
Recognise revenue when it is reasonably
measurable, else postpone till it becomes reasonably
measurable
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Revenue Recognition
Examples
Delivery is delayed at buyer s request and buyer takes title and accepts billing
Delivered subject to conditions
installation and inspection i.e. goods are sold subject to installation, inspection etc.
on approval
guaranteed sales i.e. delivery is made giving the buyer an unlimited right of return
consignment sales i.e. a delivery is made whereby the recipient undertakes to sell the goods on
behalf of the consignor
cash on delivery sales
Sales where the purchaser makes a series of installment payments to the seller, and
the seller delivers the goods only when the final payment is received
Special order and shipments i.e. where payment (or partial payment) is received for
goods not presently held in stock e.g. the stock is still to be manufactured or is to be
delivered directly to the customer from a third party
Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the
same goods at a later date
Sales to intermediate parties i.e. where goods are sold to distributors, dealers or
others for resale
Subscriptions for publications
Installment sales
Trade discounts and volume rebates
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Revenue Recognition
More Examples
Installation Fees
Advertising and insurance agency
commissions
Financial service commissions
Admission fees
Tuition fees
Entrance and membership fees
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Revenue Recognition
Problems
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Revenue Recognition
Problem 5-3
To record the write-off:
If Alcom uses the direct write-off method
DrBad Debt Expense $3000
CrAccounts Receivable $3000
If Alcom uses the allowance method
DrAllowance for Doubtful Debts $3000
CrAccounts Receivable $3000
To record the partial payment:
If Alcom uses the direct write-off method
DrCash $950
CrBad Debt Expense $950
If Alcom uses the allowance method
DrCash $950
CrAllowance for Doubtful Debts $950
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Revenue Recognition
10
Problem 5-4
The allowance for doubtful accounts should have a balance of
$51,750 on December 31 as per calculations shown below:
Days Account
Outstanding
0-15 days
Amount
Expected %
Uncollectible
Estimated
Uncollectible
$450,000
0.01
$4,500
16-30 days
150,000
0.06
9,000
31-45 days
75,000
0.20
46-60 days
45,000
0.35
61-75 days
15,000
0.50
> 75 days
15,000
1.00
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Revenue Recognition
Doubtfu
l Debts
15,000
15,750
7,500
Bad
Debts
15,000
11
Problem 5-5
Green Lawns books
Carsons books:
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Revenue Recognition
12
Problem 5-6
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Revenue Recognition
13
Revenue Recognition
14