Finance accounting assignment - Essay Example

Income encompasses both revenue and gains. Revenue is income that arises in the course of ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends and royalties. “Revenue is recognised on the provision of goods and services that relate to the ordinary activities of the entity” (ACCA, 2013). Gain or loss is calculated with reference to the amount received in excess or short of the asset's carrying amount in the books of account.

It is also important in accrual accounting that revenue and expenses are required to be matched with the accounting period. IAS 18 clearly specifies that “When the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed” (ec.europa.eu, p. 2). For instance, income received in respect of annual maintenance contract by a company can recognise only 1/12th of revenue in a month.

It is immaterial whether a sale is made on cash or credit basis. Revenue is recognized when title of the goods or services is transferred to the buyer. In the case of construction companies or the projects which takes several years for completion, revenue is recognized to the extent the project is completed during the period. In the case of ‘hire purchase’ the sale at future date is agreed between the parties. The payments collected in instalments in advance by the seller are treated as hire till the last instalment payment is collected.

Gross profit in this case is calculated only in proportion to cash received. This concept is important to avoid overstatement or understatement of profit or gains. Similarly, in sale and repurchase agreement, they should be dealt with together. IAS 18 has specified u/s14, the conditions to be satisfied for recognition of revenue from the sale of goods. Section 20 specifies the conditions for recognition of revenue associated with rendering of services and 30 specifies the bases for recognising interest, royalties and dividends.

This standard also prescribes the norms for disclosure of the accounting policies adopted for recognition of revenue, including the methods adopted to determine the stage of completion of transactions involving rendering of services. Question 2: Case Study A. In the case of sale of electrical goods, it is important to ascertain whether the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. Ibi Ryan Plc retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold as he has sold the goods and despatched them in the normal course of business.

Therefore, the accounting treatment is appropriate. B. C. The terms of the company’s contract with Witney specify that the goods remain the property of Ibi Ryan until they are paid for by Witney. Amount owing to Ibi Ryan from Witney ?600,000 includes ?50,000 for the products delivered by Liverpool warehouse. Therefore ? 600,000 treated as sale in the books of account should be reversed fully. 50% of this sale amount i.e. ? 300,000