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Financial accounting - Assignment Example

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Financial Accounting Revenue Recognition This is one of the most important concepts in accounting. It is used to assess the financial position of an organization as well as its performance. Therefore, its recognition time, and the amount of revenue to be recognised are two fundamental factors that have to be carefully addressed…
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Download file to see previous pages This is regardless on the time when the cash is actually received. In a sale proceed, the revenue is recognized when the ownership of a good or a commodity has been transferred to the buyer together with the associated risks. The amount of the proceeds has to be reliably measurable in terms of revenue. Similarly, the costs associated with the transaction should also be measurable in a reliable way. Finally, there has to be a probability that the economic benefits related to the transaction will flow or will be realised by the organization. The same criteria apply for services rendered. In case of dividends, the revenue should be recognized once the right for payment has been established (IFRS, Pg. 2). In accounting, it is important to distinguish between the terms income, revenue and gains since it will facilitate accurate and clear preparation of the financial statement (Agtarap-San, Pg. 5). Income is defined as the savings opportunity that a business entity gains within a given time and it is measured in monetary terms (Weitzman, Pg. 2). Revenue on the other hand is the income that a business entity realises from its usual operations such as the sale of goods and services (ACCA, Para 5). Finally, gains refer to the increase in shareholder’s equity as a result of a transaction other than the daily operations. These are transactions which are non- recurring, for instance sale of a fixed asset (Weltman, Pg. 70). Case Study; Ibi Ryan Plc According To IAS 18, revenue should be recognized when earned. As such, the sale of Electrical goods on 30th March should be included in the revenue for the period ended 31st March 2013. This is because it was earned within the period despite the fact that the delivery was delayed to the following period. A total of ?50, 000 should be included in the financial statements. The revenue generated from the sale proceeds of good sold to Witney Ltd should not be included in the revenue of the period ended 31st March since Ibi Ryan retained ownership of the goods. According to IAS 18, revenue is only recognized when ownership has been transferred. In addition, the announcement that the creditor would receive 50p for every 1? owed did not guarantee future economic benefits since Whitney Ltd did not state it conclusively. It stated that it is “likely” meaning there was no guarantee and hence this should not also be recognized in the revenue of that period. The total amount of ?600, 000 owing to Ibi Ryan from Witney Ltd as at 31st March 2013 could not be recognized as revenue for the period due to the fact that ownership of goods worth that amount was not yet transferred. The cost price should also not be charged to the period’s revenue. When Ibi Ryan entered a contract with PC4U, it was certain that the amount of the contract will be realised by the company in the future upon delivery of the laptops. However, in the contract, it was agreed that Ibi Ryan would provide support services for a period up to December 31st, 2015. The support services were to cost ?240, 000 each year. It was certain that these costs were to b incurred. The costs were also reliably measured. The profits to be realised from the support services were to be 25% of ?240, 000 which is equal to ?60 000. Similarly, the company was certain to get this revenue though in the future. Therefore, the revenue that would be included in the period ended ...Download file to see next pagesRead More
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