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  Recognising Revenue

Introduction to Recognising Revenue

A main issue in the measurement of profit apprehensions the point at which revenue is recognised. Revenue taking place from the sale of goods or provision of a service could be recognised at several points. In which for instance a motor car dealer receives an order for a new car from one of its customers, the related revenue could be recognised through the dealer

  • At the time that the order is placed through the customer;
  • At the time that the car is collected via the customer; or
  • At the time that the customer pays the dealer.

These 3 points could well be fairly far apart, mainly where the order is related to a specialist car that is sold to the customer on credit. The point chosen is not just a matter of academic interest: it can contain a profound influence on the total revenues reported for a specific accounting period.  Consecutively, this could have a profound influence on profit. If the sale transaction straddled the end of an accounting period, the option made among the three possible times for recognising the revenue could ascertain whether it is included as revenue of an earlier accounting period or a later one.

While dealing with the sale of goods or the provision of services, the major criteria for recognising revenue are that

  • The amount of revenue can be calculated reliably; and
  • It is possible that the economic advantages will be received.

Though, the other criterion must be applied in which the revenue comes from the sale of goods, that is

  • Control and ownership of the items should pass to the buyer.

We can observe that the influence of applying this criterion is that a sale on credit is generally identified before the cash is received. So, the total sales revenue figure displayed in the income statement might involve sales transactions for which the cash has yet to be received. Therefore the total sales revenue figure in the income statement for a period will frequently be dissimilar from the total cash received from sales throughout that period.

Long-term contracts

Both for goods and for services a number of contracts can last for more than one accounting period. If the business giving the goods or service were to wait until the contract is totally fulfilled before recognising revenue, the income statement could provide a misleading notion of the wealth produced in the several accounting periods covered through the contract.

  • Construction contracts

Services

Revenue from contracts for services might also be identified in stages. While a service is given, there will generally be a timing variation among the recognition of revenue and the receipt of cash.

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