Accounting Analysis

Revenue recognition

Revenue recognition

Question 1

Among all entities in the financial statement, revenue is viewed as the largest number beside profit in income statement of the company. The element gain tremendous amount of focus from shareholders, stakeholders and other members that are interested in monitoring the performance of the company (IFRS, 2011, pp. 5-25). In view of the significance of revenue, it is vital for the companies to calculate it in accurately and present it in fair manner in the income statement. In order to ensure perfection in revenue calculation international accounting standard board (IASB) has introduced “IAS 18” standard for the measurement and presentation of revenue.

IAS 18 - Revenue.

According to IAS 18 the term revenue is defined as 'the total inflow of monetary profit for the period occurring because of the normal actions of an organization and when resulted profit amplify the equity, in addition to offerings from contributors”. According to this illustration, revenue must be recorded as follows.

An organization must state its revenue prior to subtraction of its cost. For example, if company has sold its goods for £200 and its cost of sale is £80 then company would record revenue of £200 and not £120.

A company must document its revenue on the terms of goods or services, which are associated with company normal actions. However, if an organization sales of its fixed assets like plan and equip after the completion of useful life then loss on gain earned on fixed assets would not be considered as revenue, rather it would be treated as reduction from operating expenses.

Company would not document sales tax amount that is gathered from customer as revenue. For example, goods sold for £210, inclusive of sales tax of 10 percent then revenue would be recorded as £200 and not £220. In addition to these, if Company were acting as an agent in a transaction process instead of principal then it would record revenue as the amount gain in form of percentage of commission and not on actual sales.

Sale of goods: In case of sale of a good, company would recognize revenue after fulfilling all the necessary requirements.

The company has transmitted the considerable risk and benefits of possession of goods to purchasing company

Company after selling the goods cannot keep any authority over the goods as after sale all the control and power is transferred to the buyer.

Company must calculate the value of revenue on consistent bases

In normal circumstances, selling party would have the advantage of gaining monetary benefits that are linked with transaction process

Sale of services

According to IAS 18, revenue gain after rendering of services is documented in slightly different manner from revenue of goods (IFRS, 2011, pp. 5-2). A company would record revenue earned from services on constant bases, or after completion of every single stage of services process. In simple terms, it could be explained, as the company would document its revenue on regularly instead of recording it as a whole.

Question 2: Case study solution

In accordance with the provided information, ...