ACCOUNTING THEORY AND PRACTICE ppt

REVENUE RELATED IN RESPECT
AS 9
An Assignment submitted
For
ACCOUNTING THEORY AND PRACTICE-1
Created by:-
Mr. & Mrs. RAJAT PRIYANKA DIWAN

INTRODUCTION
Revenue is the gross inflow of cash, receivable or other
consideration arising in the course of the ordinary activities of an
enterprise from the sale of goods.
The revenue recognition principal provides that revenue is
recognized. Revenue is earned when the earnings process is
substantially complete. Revenue is realized when goods and
services are exchange for cash or claims to cash. Revenue is
realizable when assets received are convertible into a know
amount of cash.
As 9 Revenue recognition before Delivery long-term construction
accounting methods. (Percentage of completion method,
completed contract method).
As 9 Revenue recognition After Delivery methods.(The installment
sales method, The cost recovery method).

REVENUE RECOGNITION
Revenue is the gross inflow of cash,
receivables or other consideration arising in
the course of the ordinary activities of an
enterprise from the sale of good rendering of
services and use by others, of enterprise
resources, yielding interest, royalties and
dividends.
Recognition :- Process of recording and
reporting an item as an element of financial
statement.

PRINCIPLES
The revenue recognition principle provides
that revenue is recognized:-
 When it is earned, and
 When it is realized or realizable.
 Revenue is earned when the earning
process is substantially complete.
 Revenue is realized when goods and
services are exchange for cash or claims to
cash.
 Revenue is realizable when assets received

FOUR TYPES OF REVENUE TRANSACTION
 Revenue from selling products is
recognized at the date of sale (date of
delivery).
 Revenue from services is recognized
when services are performed and are
billable.
 Revenue from the use of enterprise’s
assets by others is recognized as time
passes or as the assets are used up.
 Revenue from disposal of assets (other
than inventory) is recognized at the point
of sale as gain or loss.

REVENUE RECOGNITION CLASSIFIED BY NATURE
OF TRANSACTION
Type of
transaction
Description
Of revenue
Timing of
Revenue
recognition
Revenue from sales Revenue from Revenue from
Gain or loss
fees or services interest, rents,
on
and royalties.
Disposition
Date of sale Services performed As time passes or
Date of
(date of delivery) and billable assets are used
sale or
trade-in
Sale of product rendering a Permitting use sale of
asset other
From inventory service of an asset than
inventory

REVENUE RECOGNITION AT OF SALE
REVENUES FROM MANUFACTURING AND
SELLING ARE COMMONLY RECOGNIZED AT
POINT OF SALE EXCEPTION:
1. Sales with buyback agreements.
2. Sales when right of return exists (high
rates that are not reliably estimable).
3. Trade loading/channel stuffing.

REVENUE RECOGNITION BEFORE DELIVERY
Revenue may be recognized before delivery
under certain circumstances.
 Long-term construction contracts are a
notable example.
Two methods available are:-
1. The percentage-of- completion method, and
2. The completed contract method.

REVENUE RECOGNITION BEFORE DELIVERY
Percentage-of-completion
method
Long-Term construction
accounting method
1) Terms of contract must be
certain , enforceable.
2) Certainty of performance
by both parties.
3) Estimates of completion
can be made reliably.
Completed contract method
1) To be used only when the
percentage method is
inapplicable [uncertain].

PERCENTAGE-OF-COMPLETION: STEPS
1)
2)
3)
4)
Costs incurred to date
most recent estimated total costs =PERCENT COMPLETE
Estimation total revenue X Percent complete
=revenue to be recognized to date
Total revenue to be recognized to date less revenue recognized in
PRIOR periods= Current period revenue
Current Period Revenue less current costs= Gross profit.

PERCENTAGE-OF-COMPLETION: EXAMPLE
Data: contract price: $4,500,000 Estimated cost: $4,000,000
Start date: July, 2003 Finish: October, 2005
Balance sheet date: Dec. 31Given: 2003 2004
2005
Costs to date $1,000,ooo $2,916,000
$4,050,000
Estimated costs to complete $3,000,000 $1,134,000
$ -0-
Progress Billings during year $900,000 $900,000
$1,200,000
Cash collected during year $750,000 $750,000
$2,000,000
What is the percent complete, revenue and gross profit recognized
each year?

PERCENTAGE-OF-COMPLETION: EXAMPLE
2003 2004
2005
%
complete
to-date
1,000,000 = 25%
4,000,000
2,916,000 = 72%
4,050,000
100%
Revenue
recognized
4,500,000* 25%
= 1,125,000
4,500,000*72% less
1,125,000 =
2,115,000
4,500,000 less
3,240,000 =
1,260,000
Gross Profit
recognized
1,125,000 less
1,000,000 =
125,000
2,115,000 less
1,916,000 = 199,000
1,260,000 less
1,134,000 =
126,000

REVENUE RECOGNITION AFTER DELIVERY
Revenue recognition is deferred when
collection of sales price is not reasonably
assured and no reliable estimates can be
made-
The two methods that are used are:-
 The installment sales method.
 The cost recovery method.
If cash is received prior to delivery, the method
used is the deposit method.

THE INSTALLMENT SALES METHOD
 This method emphasized income recognition
in periods of collection rather than at point of
sale.
 Title does not pass to the buyer until all cash
payments have been made to the seller.
 Both sales and cost of sales are deferred to
the periods of collection.
 Other expenses, selling and administrative,
are not deferred.

THE COST RECOVERY METHOD
 Seller recognizes no profit until cash payments
by buyer exceed seller’s cost of merchandise.
 After recovering all costs, seller includes
additional cash collection in income.
 This method is to be used where there is no
reasonable basis for estimating collectability as
in franchises and real estate.
 The income statement reports the amount of
gross profit recognized and the amount
deferred.

THE DEPOSIT METHOD
 Seller receives cash from buyer before transfer
of goods or performance.
 The seller has no claim against the purchaser .
 There is insufficient transfer of risks to buyer to
warrant recording a sale by seller.
 In the case of such incomplete transaction, the
deposit method is used.
 The deposit method thus defers sale recognition
until a sale has occurred for accounting
purposes.

SUMMARY OF REVENUE RECOGNITION
BASES
periodic income,
information about the project. And
revenues and
costs.
Completed contract Method use on short term contracts, when Percentage
of
percentage of completion method
completion method
is not used. Is not
applicable.
Completion of Production Immediate marketability at quoted
Determinable
Basis prices, until interchangeability and
revenues, but
etc. inability
to determine
the cost,
thereby defer
expense.
Installment-sales method Absence of reasonable basis for collectibility of
And cost recovery method estimating degree of collectibility receivable is so
and cost of collection. Uncertain,
gross profit

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