Q. Explain about realization principle?
Realization of revenue Under the realization principle the accountant doesn't recognize (record) revenue until the seller obtains the right to receive payment from the buyer. The seller obtains this right from the buyer at the time of sale for merchandise transactions or when services have been performed in service transactions. Legally a sale of merchandise takes place when title to the goods passes to the buyer. The time at which title passes usually depends on the shipping terms- FOB shipping point or else FOB destination. As a practical matter accountants in general record revenue when goods are delivered. The benefits of recognizing revenue at the time of sale are (a) the actual transaction-delivery of goods-is an observable event (b) revenue is easily measured (c) risk of loss due to price decline or destruction of the goods has passed to the buyer (d) revenue has been earned, or substantially so and (e) because the revenue has been earned, expenses and net income can be determined. As discussed later the drawback of recognizing revenue at the time of sale is that the revenue might not be recorded in the period during which most of the activity creating it occurred.