Revenue and Expense Recognition

Revenue and
Expense Recognition
Presented By:
Atrayi Sinha (11)
Geetanjali (21)
Pooja Babel (33)
Shreya Gupta (43)
Shristi Gupta (44)
Vanya Jajodia (56)
Revenue and Expense Recognition
Revenues
A firm can generate revenues by the
following methods:
1. Sale of products or services to customers
2. Supply of the firms resources to other firms
for use, such as rent from properties and
interest from dividends.
3. Sale of assets or investments of the entity
Revenue Recognition
Point of sale: Revenue is realized when a sales transaction takes
place in the ordinary course of business and goods
are exchanged for cash or claims to cash.
Providing services: It involves rendering of services and the revenue is
recognised usually as the services are performed
and it is immaterial whether the revenue amount is
collected in advance or later by the service
providing firm.
Goods on Sale or Return

In commercial activities, goods are supplied by a
manufacturer or a wholesaler to a retailer or a
prospective customer on the basis of sale or return.
If a retailer or prospective customer sells or retains
the goods, he/she will incur the liability towards
manufacturer or wholesaler with respect to future
payment in cash.
For a retailer , goods on sale or return are not
purchases until he/she actually incurs liability for
them i.e. goods are sold.
Installment Credit Sales

When goods are sold on installment basis, interest
should be recognized as revenue proportionate to
the unpaid balance due to the seller.
If collection is not reasonably assured ,revenue can
be recognized as and when cash installments are
received.
If there is reasonable certainty that these
payments will be made, revenue is recognized at
the time of delivery.
Production Process
Income is accrued only at the time of sale
and it should not be anticipated by
considering assets at the current market
price.
However, industries where products have
immediate marketability , revenue may be
recognized as soon as the production
process is complete.
Income Earned = Estimated sales price- Cost
of their
production
Revenue and Expense
Recognition
6
Franchise
A franchise provides an exclusive right to
use a formula, design , technique ,or
territory.
Value of franchise is small or nominal
Charged directly to the expense.
Value of franchise is significant Amortized
over the period for which the exclusive right
is available with the franchisee.
Types of Revenues
1.Capital Receipts/Capital Income
Capital profit refers to the entitys profit over and
above the cost of its fixed assets.
Capital profit is transferred to the capital reserve
whereas capital loss is charged to the income
statement of the same year or over a period of
years.
Capital Receipts can be generated by selling fixed
assets or raising loans.
For example : If machinery worth Rs. 30,000 is sold
for Rs. 32,000, there is a capital receipt of 32,000
but the capital profit is worth only Rs. 2,000.
Types of Revenues
Revenue Receipts / Revenue Income

These receipt arise in the course of an
entitys regular operating transactions
Revenue receipts comprise amounts
received from sale of goods, interest and
commission received.
Revenue profit or revenue loss is included in
the income statement in the same year in
which they occur.
Revenue Measurement
Revenue is measured in terms of estimated
amount of revenue to be received from the
customer.
It is the amount that is equal to or reasonably
certain to be realized.
For example : For a transaction involving non
cash asset like exchange of a old television for
a new one, the amount recorded will be cash
equivalent of goods received or given up.
10
Expenses
Expenses are the outflows of assets by an entity in
order to produce goods and service.
These are incurred costs associated with the revenue
of the product often directly or indirectly through
association with the period to which the revenue has
been recognized.
It can occur through the transfer of assets to customers
& use of assets in a business operation.
For Example Goods costing Rs. 8,000 were sold for
Rs. 10,000. Expense is Rs. 8,000 whereas Rs. 10,000 is
booked as an income.
11
Classification Of
Expenditure
An expenditure is a payment in cash or
barter credits, or the incurrence of a liability
by an entity, in exchange for goods or
services.
Expenditure of an enterprise can be
classified into three categories, capital ,
revenue and deferred revenue expenditure.
12
Capital Expenditure
Expenditure incurred for the purpose of
obtaining a long- term advantage for an entity.
E.g. delivery cost, installation cost
Expenditure is recognized as revenue when it
is incurred for the following purposes :
i.
ii.
iii.
iv.
Purchasing long term assets.

Capacity Expansion
Initial Expenses
Deferred benefit
13
Revenue Expenditure
Expenses which arises in the course of a firms
operating activities. E.g. - cost of stock
consumed, money spent on repairing existing
fixed assets , interest on loans etc.
Expenditure is recognized as revenue when it
is incurred for the following purposes :
i. Maintenance Charges
ii. Repair Costs
iii. Renewal Expenses
14
Deferred Revenue
Expenditure
Expenditure incurred during an accounting
period but the benefit of which is receivable
in a future period. E.g. development cost in
mines, market research
15
Books of Accounts
A company maintains all the details for
every single transaction in a the
chronological order in the books of prime
entry.
To make the work of the book keeper easier,
companies maintain different kinds of books
of prime entry to maintain different kinds of
transaction.
The different kinds of books of prime entry
are as follows:
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Books of Accounts (contd.)

Cash Book: All kind of cash transactions, like
cash payments and cash receipts, are
recorded here. It can be also used to
mention about discount allowed and
discount received transactions. Sometimes a
separate book is maintained for recording
bank transactions like cheque clearance,
overdraft. But usually both cash and bank
transactions are recorded in this book.
17

Petty cash book: Sometimes there happens a
lot of miscellaneous transactions involving
little amount of money. In order to avoid
writing too many small value transactions in
the cash book, companies keep a petty cash
book also for recording cash transactions of
small value.
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Purchase Journal: This journal is meant to
record all credit purchases. It is also known
as the purchase day book or bought day
book.
Purchase Return Journal: This book is used to
record goods purchased on credit and sent
back to the supplier if they have found not
confirming the specifications or for any other
reason.
19
Sales Journal/Sales book

This journal is meant for recording all sales of goods
on credit.
Cash Sales are recorded in the Cash Book
Sale of articles other than goods on credit are
recorded in the
Journal Proper
Entry:
Debtors Ledger to be debited
Sales a/c to be credited.

Sales Book
of ABC Ltd
Date
Name of Customer Ledger Folio Outward Invoice No
Amt( Rs)
2015
July, 12
Beta Corporation
Revenue and2,50,000
Expense Recognition
14 Zeta Company
1001
20
1002
Sales Return Book

This journal is meant to record transactions
relating to the sales of goods on credit and
received back from customers as not confirming
to the specifications or for any other reason.
The customer gets a credit note for the value of
the goods returned
Entry:
Sales Return a/c to be debited
Entry to be posted on the credit side of the
Debtors Ledger
Sales Return
Book
of ABC
Ltd Folio Credit Note No
Date
Name of
Customer
Ledger
Amt( Rs)
2015
July,and12
Beta Corporation
Revenue
Expense Recognition
2,50,000
21
1001
Bills receivable book

The Bill Receivable book of an entity consists
of all promissory notes given or bills of
exchange accepted by customers in respect of
amounts due from them
Bills Receivable Book of ABC Ltd
Date From whom Acceptor Date of Term Date of Where

Amt
How
received
Bills
Maturity Payable
(Rs) disposed
2015
Quality
Quality
8/4/15 90days 10/7/15 BOI
500000
July, 12 Dealers
Dealers
22
Bills payable book

The Bill Payable book of an entity consists of
all promissory notes given or bills of exchange
accepted by the business in respect of
amounts owing to its suppliers.
Bills Payable Book of ABC Ltd
Date Name of
Amt Remark
Drawer
(Rs)
2015
Quality
500000
July, 12 Dealers
Payee
Date of
Bill
Quality
Dealers
8/4/15
23
Term Date of
Where
Maturity Payable
90days 10/7/15
BOI
Journal Proper Book

A Journal Proper Book is used to record all
transactions that cannot be included in any of the
books mentioned earlier.
Some transactions include: Purchase or sale of
fixed assets, investment on credit, adjusting
entries, rectification entries etc.
Thus, they are meant for recording transactions
that do not occur frequently in the business and
therefore, do not warrant setting up of special
books.
Journal
proper of ABC Ltd
Date
Particulars
Credit
(Rs)
Ref
(Rs)
24
Leger Folio
Debit
CASE STUDY
Sandeep Kothari runs a printing business and operated from
a rented premise. There are three employees under Sandeep.
He used to employ a bookkeeper, but in order to cut costs, he
has decided to record all business transactions himself.
Now he records all the financial transactions at the end of
every week. Sandeeps accountant has suggested that
regular maintenance of the firms books of accounts can lead
to lower accounting fees.
Sandeep uses a manual system that consists of day book, a
cash book, purchase ledger, sales ledger and a nominal
ledger. He was, however, uncertain how to record the
following transactions:
1) Payment of Annual rent, Rs 5000
2) Purchase of printing paper from a supplier, Rs 400
3) Payment
of wages to staff, Rs25600
Revenue
and Expense Recognition
4) Sale of wedding cards resulted in sales, Rs 100
Questions :
1)In which ledgers should the transactions be
recorded? Justify
2) Suggest why accountancy fees might be
lower, if Sandeep maintains careful records.
3) What might be the consequence if Sandeep
makes a mistake while recording transactions
26
THANK YOU.
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Revenue and Expense Recognition

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Revenue and Expense Recognition

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