Guidelines for Revenue Recognition

Recognition of revenue is related to the specific time when revenues become revenues of the enterprise or the accounting entity and this fact is governed by the realization concept. The essential meaning of the realization (of revenues) is that a change in asset has become sufficiently definite and objective so that revenue can be recorded in the books of account without any delay and doubt. An item is definite when it is not likely to be cancelled, revoked or lost in foreseeable future. Similarly, an item is sufficiently objective when it appears substantially same to all accountants recording the item. It must be free from bias or personal judgment. Accountants have formulated at least four guidelines according to which revenues should be recognized in the books of accounts as soon as: (i) the business enterprise has performed substantial portion of its duty in the form of transfer of goods to the buyer or performance of service as the case may be; (ii) the revenues can be objectively determined or measured; (iii) the earning process has been substantially completed in the sense that the major portion of costs has been incurred and the remaining costs can be estimated with reasonable accuracy; (iv) the amount ultimately collectible on bills receivable or from debts has been received; an estimate can be made of the bad debts or unrecoverable amount.

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