Professional Documents
Culture Documents
Sessions 6-7
In box
When should revenue be recognized?
How much revenue should be
recognized?
How to measure monetary assets ?
Operating Cycle
Cash-to-cash
According to FASB
When
Sales orders are received
Deposit or advance payment is received
Goods are manufactured
Goods are stored after the production
process
- Goods shipped or services rendered/
performed
- Customer pays dues/ARs
Timing of Revenue
Recognition
Illustration 5-2 [Event-Time of RRMethod of RR]
- Sales order received
- Deposit or advance payment received
- Goods produced
- Production completed & goods stored
- Goods delivered or services performed
- Customer pays accounts receivable
IFRS vs GAAP on RR
RR on the transfer of risks and
rewards of ownership IFRS
RR when it is earned GAAP
But accounting for Revenue
transaction would be the same
under both GAAP & IFRS
Delivery Method
Recognize revenue when goods
or services are delivered
For goods: when title transfers
shipping point (when goods are
given to carrier)
Examples:
Order is received for INR 5000.
Sales entry?
Goods are produced. Sales entry?
Goods are shipped. Sales entry?
Consignment Transactions
No RR until the goods are sold by the
consignee- till that time, the
consignee does not assume the
risks and rewards of ownership
Consignment of goods- treated as
mere movement of goods
Consignment Method
1,000
Problem 5-5
Problem 5-5
In the books of Green Lawn
- When goods were sent on consignment
Inventory on Consignment A/C Dr $8,400
To Finished Goods Inventory A/c $8,400
-When goods are sold by the consignee
[ Carson]
A/R A/c Dr To Sales A/c $ 5,040
CGS A/c Dr to Inventory on Consignment A/c
3,360
Problem 5-5
In the books of Carson
- When goods are received on
consignment
No entry- neither own the goods nor
owe to Green Lawn for the goods
- When goods received on
consignment are sold
Cash or A/R A/c Dr To Sales Revenue
A/c $6,720
CGS A/c Dr to Accounts Payable A/c
Franchise Revenue
Recognize:
When earned/ services rendered
Not necessarily when
agreement signed or fee
received
Normally after the
commencement of operations by
franchisee
Franchise Revenue
-Example
Hudson.Agro receives
INR60,000 from a franchisee
for the right to use its
trademark for ARUN
ICECREAM for a period of 5
years. When should the
INR60,000 be recognized as
revenue?
Percentage-of-Completion Method
Design/development and
construction/production projects that
extends over several years
Customer pays either on fixed price or
cost reimbursement contract method
Reasonable assurance of profit margin and
ultimate realization
Revenue recognized based on total
percentage of project work performed
during period
Problem 5-6
Problem 5-6
Particulars
Revenue[
in $]
Expenses
[ in $]
Income
[ in $]
2004
9,80,000
2005
2006
14,70,000 22,05,000
7,21,000
11,90,000 17,15,000
Completed Contract
Method
When
Amount of income to be earned on
contract cannot reasonably be
determined
Problem 5-2
Problem 5-2
Particulars] Completed
Contract
Current
year
Completed
ContractNext Year
%
%
completion completion
current
- Next Year
year
Income
excluding
Motel[$00
0]
1,250
1,250
1,250
450
300
1,700
1,550
1,250
Income
0
from motel
project[$0
00]
EBT[$000 1,250
]
750
2,000
Production Method
Applies to agricultural and mining
companies
Criteria:
Clear market determined price
Performance substantially
completed[harvest]
Fluctuating prices of mining products
Installment Method
Problem 5-1
Problem 5-1
Sales
Jan
Method
Feb
Mar
Apr
May
June
Sales
8,000
13,000
11,000
9,000
13,500
7,800 5,200
8,450
7,150
5,850
8,775
4,200 2,800
4,550
3,850
3,150
4,725
Sales
11,00
0
10,000
11,500
10,500
10,500
9,500
CGS
7,150
6,500
7,425
6,825
6,825
6,175
Gross
Profit
3,850 3,500
4,025
3,675
3,675
3,325
CGS
Gross
Profit
12,00
0
Install
ment
method
Real
Estate
Sales
Developer often finances over many years
Uncertainty of income due to uncertainty of
receipt of future payments
Conditions required for revenue
recognition:
Period allowing cancellation and refund to buyer
has expired
Cumulative payments equal to 10% of purchase
price
Seller has completed or is clearly capable of
completing required improvement
Bad Debts
Direct Write-Off Method
Allowance Method
Estimate amount of current period
credit sales that will not be collected
Historical % of sales tempered by
judgment.
Historical % of aged receivables (+
judgment)
Aging Schedule
Categories: Current, o/s less than
30 days, 30-60 days, 61-90 days, 91180, above 180 days
Amount O/S
Estimated % of uncollectible
Allowance for DD
Allowance Method
Allowance is a contra-asset
account
Collection of a bad debt that
was written-off:
Cash A/c Dr
To Allowance for Doubtful Accounts
- In B/S , AR is shown net of
allowance for doubtful accounts
Problem 5-3
Problem 5-3
Under Direct Write off Method
- To record the write off
Bad debt expense A/c Dr $3,000
To Accounts Receivable A/C $3,000
-To record the partial payment
Cash A/c Dr $950
To Bad debts recovered A/c $950
Problem 5-3
Under the Allowance method
- To record the write-off
Allowance for Doubtful A/c Dr $ 3,000
To Accounts Receivable A/c $ 3,000
- To record the partial amount
Cash A/c Dr $ 950
To Allowance for Doubtful A/c $950
Problem 5-4
Estimated
Uncollectibl
e[in $]
4,500
9,000
15,000
15,750
7,500
51,750