Free Essay about Revenue Recognition

Published: 2022-04-13
Free Essay about Revenue Recognition
Type of paper:  Course work
Categories:  Business Financial management
Pages: 7
Wordcount: 1913 words
16 min read

Time Measurement Revenue Recognition

Revenue is considered the largest number when it comes to the reference to the financial statements in every entity other than the financial institutions. User attention, therefore, is one of the biggest deals that attraction is guaranteed when we refer to the revenue of any entity (Wagenhofer, 2014, p. 350). Many may question the impact or the significance of profits in the business entities, but in a real sense, the revenue does not fall that far much behind since it is the essential factor to the generation of the profits and the entire running of the entity. When we consider the external results that are open to the public and any other person besides the inside people at an organization, everyone tends to focus massively on the revenue since it is the headline number that defines element performance (Nobes, 2012, p. 87). In fact, it is the key to growth when it comes to the determination of performance and packages that are tied to executives and management of any other department in an entity. All this brings us to the time measurement of revenue and its recognition since when we refer to the financial statements its importance is duly recognized.

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In most cases, entities tend to measure the revenue recognition fairly with most useful information been adhered to as the key appraisal in performance is given to the useful part of revenue recognition (Lamoreaux, 2012, p. 30). Guidance on the revenue and contracts of various revenue and recognition of the same have been set by the International Accounting Standards Board (IASB). As per the basic terms, they have issued two International Financial Reporting Standards (IFRSs) in which majority entities have in one way or the other applied some basic approach on the same principles and other terms under the construction sector (Sedki et al., 2014, p. 120). Under the performances of the income statement as per the consideration of the measurement of the revenue recognition, these principles in many ways have standards that in every way are based on some short and detailed particulars as set by the IAS 18. Due to the existence of the IFRSs, there have been some considerations and complains about the right approach to the time measurement of the revenue recognition given some factors like uncertainty and other rigorous criteria that as for the pertained IASB, have many standards that are examined by replacement of other future comprehensive standards of every entity.

Implications from Revenue Recognition and Measurement

Under the IAS revenue is the gross inflow that is attached to every economic benefit in the entity in which they are as a result of the increase in the equity and any other activities of the ordinary operations. However, this does not have any attachment or relationship with the contributions increase from the equity participants of the specific business. As per the time measurement of revenue recognition, some factors such as the deduction of the cost of sales have a direct impact, such that the revenue is stated before they come in (Wagenhofer, 2014, p. 367). it through the provision of goods that the revenue is recognized, something that tells us that the time recognition and measurement of revenue does away with the major issues surrounding the deductions that are made on the operating expenses which in this case are the disposals on loss and profit of any other entity or operation. Sale taxes too, which are not in any case collected from the clients or remitted into the entities accounts are never valued as revenues because they are inclusive taxes, and revenue is, in this case, a principal attached to the amounts remitted or recognized.

Principles that Underpin the Recognition of Revenue

As for the terms set by the IAS the recognition of these principles, as far as the revenue measurement and recognition is concerned starts with the sale of goods. Sale of goods provides some determinants as to when the revenue is recognized since it can never be measured or recognized before there has been a transfer of the significant available risks that are attached to some goods from the seller to the buyer (Nobes, 2012, p. 87). In this case, the amount of the revenue recognized can be said to be measured on some reliably probable condition which determines the benefits of economic transactions which take place after some sales. The condition of costs incurrence or future incurrence must also be satisfied for the recognized principles of revenues to take place. With this considered, some of the interpretation given to some principles vary as many people recognize revenue on the basis of sales of goods unlike when we consider the revenue recognition from the income statements and other financial records where uncertainty varies in which specific entry requires some consideration of the services provided as part of the measurement.

When it comes to the provision of services, revenue recognition and measurement takes a new way with different approach been the basic outcome after some transactions that in many terms can be described as the ones that are associated to the estimations of reliable services rendered (Lamoreaux, 2012, p. 30). What this means is that in the provision of services rendered, the revenue recognition takes the in consideration of the reporting period and the completion estimations that are arguably the major reference point of sales of goods approach. In this case, the amount of revenue is reliably measured and recognized after the benefits associated to the economic probable are transferred to the seller or the service provider. All this imply that costs incurred as per the date of the service transaction are a complete measure of the reliable recognition of the revenues. As per the IAS 18, when there are impossible efforts to the reliable measurements to the general outcome of the transactions which involve the service provided, the revenue is supposed to be measured and recognized as an extensive part of all the costs that were incurred by the service provider. In this case is the seller while also assuming every other aspect of the recoverable costs from the one who the services have been provided to, who in this case is the buyer.

The construction contracts are the other relative part of addressing the revenue recognition especially since this applies to the basic principles that are contracts that can be related to the assets and asset combination as an aspect of measurement of revenue (Lim et al., 2017, p. 347). The reason as to this is because; most of these construction contracts are based on some fixed prices which the seller gets into terms with hence the subject of cost escalation. These contracts are therefore related to the supply and sales of goods which can, therefore, be used in measuring or recognizing the revenue. In this regard, revenue recognition is the future since it is through this that the fixed contracts can have some supply timing and suitable application of measurements and recognition of revenues based on the assets that are combined for the outcomes expected in the contracts for construction. In this case, contract revenues are measured as they are associated with some economic benefits of the contract that fits the seller.

Revenue recognition is usually accrued in any accounting system once revenue of the organization is earned. Normally, the importance and significance of recognition of revenue in any entity or organization are derived from the mere utilization of the revenue earned especially when it comes to an accounting of the earnings of the specific financial period. The principle of revenue recognition is essential in any accounting system of an organization (Thornton, 2018, p. 94). The main reason behind this argument is because overlooking or rather ignoring this principle when carrying out financial and accounting math of any period would lead to the distortion of the organization's statement of financial position. It is necessary for every financial accountant to note that paying attention to this principle while maintaining the different books of accounts is very important since lack of adherence to this principle would result in declined sales. In instances like this, the statements of accounts at times balance despite the incorrect recordings since such mistakes as understatements due to lack of adherence to the principle of time measurement of revenue recognition are hidden or rather covered up for by overstatements of different entries in the books of accounts.

Despite the fact that the balances on the books of accounts might balance, the statements will be wrong altogether since some entries will be recorded wrongly. Therefore, it will conflict between the days books kept on a daily basis such as the day sales books which are books of accounts maintained in any organization whereby sales are recorded on a daily basis (Bordignon, 2017). In such cases as this, any deposit used as collateral for any chance that completion of agreed-upon tasks at specific periods is refunded back as recognized revenue. The revenue, in this case, is the cash inflow that is refundable and is more of a bet placed for chances that a task may be completed in a certain future period. If completed in the specified time, it is more of an asset to the organization since it is earned revenue, but in cases where the task is not accomplished within the agreed time, the recognized revenue is termed as a liability to the organization. The principle of revenue recognition in preparation of financial statements in any given organization is really important since it brings out a clear distinction between expenses of the given financial period and general expenses incurred in the organization including costs incurred for acquisition of machinery and other forms of assets in the organization (Chandra et al., 2018).

Importance of The Revenue Recognition Principle

In today's accounting statements and activities, the principle of timing management of revenue recognition is emphasized a lot due to the benefits and advantages that an organization and financial information users get from financial statements prepared under this principle (Rutledge et al., 2016, p. 44). The main reason as to why this concept is fundamental to both internal and external users of the financial information on the accounting statements maintained in the organization is because it mainly aimed at target and objective achievement. Internal users of the financial statements in any organization benefit from financial statements recorded with respect to the concept of revenue recognition. The reason behind is that they are in a position to rule out bonuses and opportunities that they should keep and those that they should let go for the greater benefit of the company at large (Peters, 2018, p. 16). On the other hand, external users of the information maintained in the financial positions benefit from the principle of revenue recognition in any organization since they are in a position to determine whether to hold or sell their stakes in their organization.

The reason why revenue recognition is vital in the recording and maintenance of financial statements in entities is because it is only through revenue evaluation in an entity is put in a position to evaluate and gauge whether they are meeting their set targets in the short and long run (Gordon et al., 2017). On the same account, revenue recognition is important to any organization since it is through this concept that a business is propelled towards the achievement of its success since it will be able to evaluate its revenue hence set out strategies to generate more revenue and hence more profits through methods and strategies such as increased equity (Martin & Van, 2015, p. 309). Typically, revenue recognition in financial pos...

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