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Realisation Principle – Recognition at the time of sale

April 28, 2019 by admin Leave a Comment

Recognition at the time of sale. This is the most common basis of revenue recognition. The objective of manufacturing or purchasing goods is achieved in the business when the goods are sold away. Thus, income is deemed to be realised when a sale in the ordinary course of business is effected unless the circumstances are such that collection of the sales price is not reasonably assured. From the legal point of view, the sale is taken to be completed when the ownership in goods is transferred from the seller to the buyer. It should be noted that transfer of ownership does not depend on delivery of goods or payment of the price. Both of these obligations may be performed in future also. What is necessary is that the buyer should be responsible to take delivery of the goods or make payment of the price for them. Whether, he takes delivery dfjôods or makes payment of the price now or later is immaterial. Difficulties arise in recognising revenue in case of those businesses which are engaged in providing services rather than selling of goods, e.g., public utility concerns such as Electricity Companies, Water Works, Railways, etc. In case of such businesses, the revenue should be taken to be realised when the invoicing or billing is done for furnishing of services. In other words, accrual basis is the most appropriate basis for recognition of revenue in such cases.

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