Questions and Answers
What is the primary focus of the realization concept in revenue recognition?
The realization concept focuses on recognizing revenue when it is earned, not when the money is received.
When are revenues considered in the accounts according to the realization concept?
Revenues are considered in the accounts when they are earned, regardless of when the payment is received.
Provide an example of the realization concept in practice.
A customer pays Rs.1,000 in advance for a custom-designed product. The seller does not realize the Rs.1,000 of revenue until its work on the product is complete.
What is the difference between advance payments and delayed payments from a business perspective?
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What is the main principle of the matching concept in accounting?
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How does the matching concept differ from the traditional approach of recording expenses when they are paid?
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Provide an example of the matching concept in practice.
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Why is the matching concept essential in accounting?
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What is the concept of materiality in financial statements?
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On what factors does the materiality of information depend?
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What do we do with immaterial information?
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When presenting immaterial information collectively, what is the criteria?
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Name one example of the materiality concept.
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What is the realization concept in revenue recognition?
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When are sales recognized according to the realization concept?
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What is the relationship between materiality and revenue recognition?
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What is the basis for recognizing revenue according to revenue recognition rules?
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What is the main goal of objectivity in revenue recognition?
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What is an example of objectivity in revenue recognition?
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Why is consistency important in accounting methods and treatments?
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What are the advantages of consistency concept?
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What is the condition under which a company can switch to another accounting method?
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What is the purpose of disclosure in financial statements?
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What information must be disclosed in financial statements?
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Study Notes
Current Liability and Current Asset
- Prepaid income (advance) is a current liability.
- Delayed income is a current asset.
Realization Concept
- Develops rules for recognition of revenue.
- Revenues are recognized when earned, not when money is received.
- Examples:
- Advance payment for goods: revenue is recognized when the product is complete.
- Delayed payments: revenue is recognized when the shipment is completed.
Matching Concept
- Expenses should be recognized and recorded when they can be matched with the revenues they helped generate.
- Expenses shouldn't be recorded when they are paid.
- Example:
- Commission received in September 2021 for sales made in August 2021: revenue recognition is based on verifiable evidence like delivery of goods or issue of invoices.
Objectivity Concept
- Recognition of revenue should be based on verifiable evidence.
- Main goal is to ensure that financial statements are based on objective evidence.
- Example:
- Recognition of revenue based on delivery of goods or issue of invoices.
Consistency Concept
- Companies should choose the most suitable accounting methods and treatments and apply them consistently in every period.
- Advantages:
- Treatment for same product in different statements is similar.
- Easy to compare financial statements.
- Convenient for users of financial statements.
- Better decision making.
- Examples:
- Using the same depreciation method for the same product in different branches.
Disclosure Concept
- Financial statements should reflect a true and fair view of the financial position and performance of the enterprise.
- All material and relevant information must be disclosed in the financial statements.
Materiality Concept
- Information is material if it can influence the decisions made by stakeholders.
- Materiality depends on the size and nature of the item.
- Factors deciding materiality:
- Size of the item.
- Nature of the item.
- Immaterial information:
- Can be aggregated with similar amounts and need not be presented separately.
- Examples:
- Rs.100 is material for a small scale business, but immaterial for a larger business.
- Small payments like postage, stationery, and cleaning expenses should be grouped together as sundry expenses.
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Description
Learn about the realization concept in accounting, which provides rules for recognizing revenue when it is earned, not when money is received.