Revenue recognition in Goods Sold
Revenue is the key determinant of an entity financial performance. Revenue is measured at the fair value of the consideration of receiving & receivable.
Timing of revenue recognition is very important or when the revenue should be recorded in profit & Loss. If you are in the business of selling the goods, then you should recognize the revenue when all the following condition is met.
- When you have transferred significant risk and rewards of ownership of the goods to the buyer
- You retain no ownership control over the goods that you have sold.
- Amount of revenue can be reliably measured.
- Economic benefits associated with the entity will flow to the entity
- Cost incurred or to be incurred will be measured reliably.
Goods Sold for Cash
Revenue should be recognized immediately as all the conditions are met in cash sale provided there is no obligation of reward or warranty. Goods risk & rewards have been passed & revenue is measured effectively.
Goods Sold on Cash or Credit & subject to 30 days refund
Revenue can be recognized when the entity can reliably estimate post-sale obligation and they would record a provision for refunds. If the entity cannot reliably measure their post-sale obligations, then the revenue cannot be recognized until the expiry of the obligation. The amount received can be recognized as unearned revenue or deferred revenue.
Goods Sold on Credit
If you have transferred the risk & rewards of ownership to the buyer then the revenue is recognized on the acceptance of the delivery.
Goods Subject to Installation
Risk & rewards cannot be recognized until the installation of the product has not been done. There is an exception to above, if the installation is considered as simple then your revenue is recognized on delivery.
Payment made in Advance
You can treat payment made of the order in advance as revenue once the delivery of the goods has taken place i.e. Risk & reward have been transferred.
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