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Revenue Recognition and Measurement

For the purpose of preparing fair and true financial statement of the company, it has to take the correct decision about the revenue for the period. Suppose the revenue is overstated or understated it should affect the reality of the financial statement. Before we proceed to consider the problem of revenue recognition and measurement, it is useful to know the meaning of revenue for an accounting period.

According to the Financial Accounting Standards Board of USA. “Revenues are inflows or other enhancements of assets of an enterprise or settlements of its liabilities (or a combination of both) during a period from the delivering or producing goods, rendering services, or other activities that constitute the enterprises ongoing major or central operations”.

The problems of revenue recognition could arise due to the following reasons:

(i)                 The seller receives the money from the buyer at a time different from the time of delivery of goods sold.

(ii)               The buyer may pay money for the purpose of goods purchased at a point of time later than the date of billing.

(iii)             Receipt of the sales price prior to the delivery of goods or billing. 

 

Following are the methods exist as to when revenue could be recognized.

(i) Recognition at the time of sale

(ii) Recognition at the time when the sales price is collected

(iii) Recognition at the time when the product is completed

(iv) Recognition proportionately over the period of performance of the contract.