Revenue Recognition

When does revenue should be recognized in the books of accounts? The answer to this question is covered in IAS 18 Revenue Recognition under the generally accepted accounting principles (GAAP). It elaborates the precise conditions under which incomes can be recognized as revenues. Broadly speaking revenue can be recognized in the books of accounts when it is measurable and after any particular significant event has occurred giving the reasonable surety of the income or revenue.

Generally in many instances revenue is recognized in the books of accounts whenever the firm delivers the products or renders services. But there are some exceptions in quite a few situations. The exception usually applies when a firm operates with expectations of larger returns. In this situation revenue is required to be recognized after the expiration of the return period.

In numerous circumstances the revenue recognition principle is used to play with the accounting information. It has been observed that in bad years some companies grant extensive credit at the close of the financial period and recognize in the books to show a boost in the sales.

[adsense]

For the recognition of revenue two conditions are required to be met:

• Obligation to the customer is complete. In other words goods are actually delivered or services are rendered. Customer has not further claim for delivering or rendering of goods and services.

• The company has a reasonable assurance based on financial position of the customer, past experience, or some reliable information that customer will pay off bills.