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AS 9
REVENUE RECOGNITION
1
OBJECTIVES
To recognize revenue in the statement of
profit and loss account arising in the ordinary
course of business i.e. from
A. The Sale of Goods
B. The Rendering of Services ; and
C. The use by Others of enterprise resources
yielding interest, royalties and dividends.
2
APPLICABILITY
This standard does not apply to
1. Revenue arising from Construction Contracts.
2. Revenue arising from Hire Purchase or Lease
Agreements.
3. Revenue arising from Government Grants or
other similar subsidies.
4. Revenue of Insurance Companies arising from
insurance business.
3
DEFINITION
REVENUE
Revenue is the gross inflow of cash,
receivables or other consideration arising in
the course of ordinary activities of an
enterprise
- from the sale of goods,
- from the rendering of services and
- from the use of enterprise’s resources by
others yielding interest, royalty and dividend.
4
Revenue Producing Activities/earning
process/operating cycle
Revenue arise from those activities that are
designated business operations like :
1. Acquisition of resources
2. Receipt of customer orders
3. Production
4. Delivery of goods or performance of
services
5. Collection of cash
5
Revenue Recognition Criteria :
Revenue Recognition Criteria are based on the desire
for both relevant and reliable accounting information.
AS-9 ‘Revenue Recognition’ contains the following
criteria for revenue recognition :
1. Revenue recognised at the point of sale
2. Revenue Recognition in Sale of Services
3. Revenue Recognition in Construction Work
4. Revenue Recognition in Instalment Credit Sales
5. Revenue Recognition using Production Method
6. Revenue Recognition when a firm receives interest,
royalties and dividends
7. Money received or Amounts paid in advance
6
1. Revenue recognised at the point of sale
• The enterprise’s earning process should be
substantially complete before revenue is recorded.
• Revenue should be realised before it is recorded in the
books of accounts. Realised means :
- goods/services exchanged for cash/claims to cash
Two conditions :
1. revenue earned
2. revenue realised
When to recognise ?
- seller has transferred the property in goods to the
buyer for a price
7
2. Revenue Recognition in sale of Services
• In transactions involving sale or rendering of
services, revenues are usually recognised as
the services are performed.
Examples :
1. Repair of automobiles
2. rental hotel rooms
3. real estate broker
8
3. Revenue Recognition in Construction Work
Some projects/works take longer than usual and
may extend over several years.
Examples : dams, bridges, aircrafts, ships, buildings
etc.
• The long-term contract has provisions for pre-
determined amounts the customer may pay at
different points and stages of work
OR
Suggest a formula that will determine customer
payments within the actual project costs plus a
reasonable profit.
9
Revenue recognition : Construction Projects
(i) Percentage Completion Method
(approach is reverse to Matching concept)
It allocates the estimated total gross profit on contract
among the several accounting periods involved in
proportion to the estimated percentage of the
contract completed each period .
If the income earned by the work done in the period
can be reliably estimated, then revenue is
appropriately recognised in each such period.
It is called so because the amount of revenue is related
to the percentage of the total project work that was
performed in the period.
10
(ii) Completed Contract Method
Recognises revenue :
- when the final act takes place and the
service is chargeable
- when final approval for the project is given
by the customer.
Use :
- when projects completed each year
- when reasonable estimates of future costs
can’t be done.
11
4. Revenue Recognition in Instalment Credit
Sales
• In Instalment, sales revenue is not recognised at the
point of sale.
WHY ??
• Revenue is recognised when the instalment payments
are received.
• Two methods :
- Instalment Method (instalment payment is
‘revenue’ and proportionate part of the cost of sales
becomes costs in the same period)
- Cost Recovery Method (all cash collections are
recovered as returns to cost and additional cash
receive d is income)
12
5. Revenue Recognition using Production
Method
In some cases, the amount of income that can
be earned can be reliably measured as soon as
the production is over.
e. g: revenue can also be recognised at the time
of harvest.
It happens in cases where :
- market risk is negligible
- market exists
- government guarantee
13
6. Revenue Recognition when a firm receives
interest, royalties and dividends
A firm may allow others to use its resources
and thereby can receive :
- Interests (on time basis)
- Royalties and; (depends upon agreement)
- Dividends (when right to receive payment
is established)
14
7. Money received or Amounts paid in advance
Sometimes money is received or amounts are
billed in advance e. g rents
• Some items are rightly not treated as revenue of
the period in which they are received but as
revenue of the future period or periods in which
they are earned.
So, they become ‘unearned revenue’ (liabilities)
When earning process is complete , it results in
recording a decrease in liability.
15
Measurement of Revenue Recognised :
Revenue = value of goods and services ie. Amount customers
pay.
In practice, to determine the amount likely to be paid by
customers (revenue), some adjustments shall be made in the
gross sales value of the goods and services sold.
Those adjustments are :
1. Discounts
2. Sales Returns and Allowances
3. Bad Debts
4. Revenue Measurement in Non-Cash Transactions
16
1. Discounts
- Trade discount (used in determining invoice price).
Thus, sales revenue will be recorded at not more than
the sale value of actual transaction.
- Cash discounts (To encourage prompt payments,
early payments firms designate a discount period
shorter than credit period)
Cash Discount is recorded in two ways :
1. Payment at the time of sale (deduct cash
discount from the gross sales)
2. Payment during the discount period not at the
time of sale (cash discount – expense ; sales revenue –
gross sales w/o deduction)
17
2. Sales returns and Allowances
- If sales are returned, the amount of cash
finally to be received can be less.
- Sales Return are deducted from the gross
sales and remaining is revenue.
(practically, sales return in a period may be
different from the period of actual sales)
18
3. Bad Debts
- Bad Debt expense is classified as a selling expense on
the profit & loss account, some treat is as administration
expense
Two methods :
1. Direct Write-off method
are shown when they are discovered and vary from the
sales for which they happened. The result is sales and
corresponding bad debts may appear in income
statements of different periods
2. Allowance Method (based on matching concept)
debt expense is shown as an estimate in advance that
will result from a period’s sales in order to show the bad
debt expense in the same period
19
4. Revenue Measurement in Non-Cash
transactions
• Amount to be recorded will be the cash
equivalent of the goods received or given up
20
expenses
Expenses are monetary amount of
resources used up or expended by an
entity during a period of time to earn
revenues
21
Expenses and unexpired costs
Expenses are incurred costs
associated with the revenue of the
period ,often directly but frequently
indirectly through association with
the period
Cost to be associated with future
revenue is unexpired costs
22
Categories of expenses
• Costs of assets used to produce revenue
• Expenses from non reciprocal transfers and
casualities
• Costs of assets other than products
• Costs incurred in unsuccessful efforts
23
Expenses recognition
• Matching process
• Systematic and rational allocation
• Immediate recognition
24
Gains and losses
• Gains are defined as increase in net assets
other than from revenue or from changes in
capital
• Gains are increase in equity from incidental
transactions of an entity
25
Features of gains and losses
• Gains and losses result from enterprises
incidental transactions
• Gains and losses may also be described as
operating or non-operating depending upon
their relation to an enterprise`s earning
process
26
Recognition of gains and losses
• Realization principle is followed in recognition
of gains and losses
• However, an increase in the market value of
securities may under some circumstances ,be
sufficient evidence to recognise gain
27
Recognising unrealised holding gains
and losses
• Gains are generally not recognised until sale
or exchange has taken place
• However, there are proposals which are
concerned with changes in values of individual
assets rather than changes in purchasing
power of money which is reflected in general
price level
28
Edward and bell concept of business
income
• Edward and bell developed the concept of
business income
• It is based on replacement cost valuation and
recognises only the gains accruing during the
period
29
How it is calculated
It comprises of following:
• 1 current operating profit(current value of
output sold and current value of input)-X
• 2 the realised and accrued holding gains of the
period-Y
• 3 the unrealised holding gains of the period –
W
• Bi= X+Y+W
30

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-revenue in as 9 methods ppt

  • 2. OBJECTIVES To recognize revenue in the statement of profit and loss account arising in the ordinary course of business i.e. from A. The Sale of Goods B. The Rendering of Services ; and C. The use by Others of enterprise resources yielding interest, royalties and dividends. 2
  • 3. APPLICABILITY This standard does not apply to 1. Revenue arising from Construction Contracts. 2. Revenue arising from Hire Purchase or Lease Agreements. 3. Revenue arising from Government Grants or other similar subsidies. 4. Revenue of Insurance Companies arising from insurance business. 3
  • 4. DEFINITION REVENUE Revenue is the gross inflow of cash, receivables or other consideration arising in the course of ordinary activities of an enterprise - from the sale of goods, - from the rendering of services and - from the use of enterprise’s resources by others yielding interest, royalty and dividend. 4
  • 5. Revenue Producing Activities/earning process/operating cycle Revenue arise from those activities that are designated business operations like : 1. Acquisition of resources 2. Receipt of customer orders 3. Production 4. Delivery of goods or performance of services 5. Collection of cash 5
  • 6. Revenue Recognition Criteria : Revenue Recognition Criteria are based on the desire for both relevant and reliable accounting information. AS-9 ‘Revenue Recognition’ contains the following criteria for revenue recognition : 1. Revenue recognised at the point of sale 2. Revenue Recognition in Sale of Services 3. Revenue Recognition in Construction Work 4. Revenue Recognition in Instalment Credit Sales 5. Revenue Recognition using Production Method 6. Revenue Recognition when a firm receives interest, royalties and dividends 7. Money received or Amounts paid in advance 6
  • 7. 1. Revenue recognised at the point of sale • The enterprise’s earning process should be substantially complete before revenue is recorded. • Revenue should be realised before it is recorded in the books of accounts. Realised means : - goods/services exchanged for cash/claims to cash Two conditions : 1. revenue earned 2. revenue realised When to recognise ? - seller has transferred the property in goods to the buyer for a price 7
  • 8. 2. Revenue Recognition in sale of Services • In transactions involving sale or rendering of services, revenues are usually recognised as the services are performed. Examples : 1. Repair of automobiles 2. rental hotel rooms 3. real estate broker 8
  • 9. 3. Revenue Recognition in Construction Work Some projects/works take longer than usual and may extend over several years. Examples : dams, bridges, aircrafts, ships, buildings etc. • The long-term contract has provisions for pre- determined amounts the customer may pay at different points and stages of work OR Suggest a formula that will determine customer payments within the actual project costs plus a reasonable profit. 9
  • 10. Revenue recognition : Construction Projects (i) Percentage Completion Method (approach is reverse to Matching concept) It allocates the estimated total gross profit on contract among the several accounting periods involved in proportion to the estimated percentage of the contract completed each period . If the income earned by the work done in the period can be reliably estimated, then revenue is appropriately recognised in each such period. It is called so because the amount of revenue is related to the percentage of the total project work that was performed in the period. 10
  • 11. (ii) Completed Contract Method Recognises revenue : - when the final act takes place and the service is chargeable - when final approval for the project is given by the customer. Use : - when projects completed each year - when reasonable estimates of future costs can’t be done. 11
  • 12. 4. Revenue Recognition in Instalment Credit Sales • In Instalment, sales revenue is not recognised at the point of sale. WHY ?? • Revenue is recognised when the instalment payments are received. • Two methods : - Instalment Method (instalment payment is ‘revenue’ and proportionate part of the cost of sales becomes costs in the same period) - Cost Recovery Method (all cash collections are recovered as returns to cost and additional cash receive d is income) 12
  • 13. 5. Revenue Recognition using Production Method In some cases, the amount of income that can be earned can be reliably measured as soon as the production is over. e. g: revenue can also be recognised at the time of harvest. It happens in cases where : - market risk is negligible - market exists - government guarantee 13
  • 14. 6. Revenue Recognition when a firm receives interest, royalties and dividends A firm may allow others to use its resources and thereby can receive : - Interests (on time basis) - Royalties and; (depends upon agreement) - Dividends (when right to receive payment is established) 14
  • 15. 7. Money received or Amounts paid in advance Sometimes money is received or amounts are billed in advance e. g rents • Some items are rightly not treated as revenue of the period in which they are received but as revenue of the future period or periods in which they are earned. So, they become ‘unearned revenue’ (liabilities) When earning process is complete , it results in recording a decrease in liability. 15
  • 16. Measurement of Revenue Recognised : Revenue = value of goods and services ie. Amount customers pay. In practice, to determine the amount likely to be paid by customers (revenue), some adjustments shall be made in the gross sales value of the goods and services sold. Those adjustments are : 1. Discounts 2. Sales Returns and Allowances 3. Bad Debts 4. Revenue Measurement in Non-Cash Transactions 16
  • 17. 1. Discounts - Trade discount (used in determining invoice price). Thus, sales revenue will be recorded at not more than the sale value of actual transaction. - Cash discounts (To encourage prompt payments, early payments firms designate a discount period shorter than credit period) Cash Discount is recorded in two ways : 1. Payment at the time of sale (deduct cash discount from the gross sales) 2. Payment during the discount period not at the time of sale (cash discount – expense ; sales revenue – gross sales w/o deduction) 17
  • 18. 2. Sales returns and Allowances - If sales are returned, the amount of cash finally to be received can be less. - Sales Return are deducted from the gross sales and remaining is revenue. (practically, sales return in a period may be different from the period of actual sales) 18
  • 19. 3. Bad Debts - Bad Debt expense is classified as a selling expense on the profit & loss account, some treat is as administration expense Two methods : 1. Direct Write-off method are shown when they are discovered and vary from the sales for which they happened. The result is sales and corresponding bad debts may appear in income statements of different periods 2. Allowance Method (based on matching concept) debt expense is shown as an estimate in advance that will result from a period’s sales in order to show the bad debt expense in the same period 19
  • 20. 4. Revenue Measurement in Non-Cash transactions • Amount to be recorded will be the cash equivalent of the goods received or given up 20
  • 21. expenses Expenses are monetary amount of resources used up or expended by an entity during a period of time to earn revenues 21
  • 22. Expenses and unexpired costs Expenses are incurred costs associated with the revenue of the period ,often directly but frequently indirectly through association with the period Cost to be associated with future revenue is unexpired costs 22
  • 23. Categories of expenses • Costs of assets used to produce revenue • Expenses from non reciprocal transfers and casualities • Costs of assets other than products • Costs incurred in unsuccessful efforts 23
  • 24. Expenses recognition • Matching process • Systematic and rational allocation • Immediate recognition 24
  • 25. Gains and losses • Gains are defined as increase in net assets other than from revenue or from changes in capital • Gains are increase in equity from incidental transactions of an entity 25
  • 26. Features of gains and losses • Gains and losses result from enterprises incidental transactions • Gains and losses may also be described as operating or non-operating depending upon their relation to an enterprise`s earning process 26
  • 27. Recognition of gains and losses • Realization principle is followed in recognition of gains and losses • However, an increase in the market value of securities may under some circumstances ,be sufficient evidence to recognise gain 27
  • 28. Recognising unrealised holding gains and losses • Gains are generally not recognised until sale or exchange has taken place • However, there are proposals which are concerned with changes in values of individual assets rather than changes in purchasing power of money which is reflected in general price level 28
  • 29. Edward and bell concept of business income • Edward and bell developed the concept of business income • It is based on replacement cost valuation and recognises only the gains accruing during the period 29
  • 30. How it is calculated It comprises of following: • 1 current operating profit(current value of output sold and current value of input)-X • 2 the realised and accrued holding gains of the period-Y • 3 the unrealised holding gains of the period – W • Bi= X+Y+W 30