Accounting Concepts -9. Realisation Concept or Revenue Recognition Concept:
It is true that revenue results from the sale of goods or from the service rendered. But the question is as to when (i.e., at what point of time) the revenue results from the sale of goods or the service rendered. The realisation concept gives clarification on the this point.
According to the realisation concept, revenue is recognised or is considered as being earned on the date on which it is realised. Revenue is considered as being realised not when goods are manufactured or order is received or contract is signed, but on the date on which goods or services are transferred to the customer and the customer becomes legally liable to pay for them. This point can be explained with an example, suppose an order for the supply of goods was received on 1st April 1992, the goods were actually sold and legally transferred to the buyer on 1st May 1992 and the payment for the goods sold was received on 1st June 1992. In this case, the revenue from the sale of goods should be recognised (i.e., should be considered to have been realised or earned) neither on 1st April 1992 nor on 1st June 1992, but only on 1st May 1992.
It is true that revenue results from the sale of goods or from the service rendered. But the question is as to when (i.e., at what point of time) the revenue results from the sale of goods or the service rendered. The realisation concept gives clarification on the this point.
According to the realisation concept, revenue is recognised or is considered as being earned on the date on which it is realised. Revenue is considered as being realised not when goods are manufactured or order is received or contract is signed, but on the date on which goods or services are transferred to the customer and the customer becomes legally liable to pay for them. This point can be explained with an example, suppose an order for the supply of goods was received on 1st April 1992, the goods were actually sold and legally transferred to the buyer on 1st May 1992 and the payment for the goods sold was received on 1st June 1992. In this case, the revenue from the sale of goods should be recognised (i.e., should be considered to have been realised or earned) neither on 1st April 1992 nor on 1st June 1992, but only on 1st May 1992.
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