18 Questions
According to the realization concept, when should revenue be recognized for an increase in the market value of an asset?
When the asset is sold
Which accounting system is required by the accrual concept?
Mercantile system of accounting
Under the accrual concept, when should revenue be recognized?
When the revenue is earned
What does the dual aspect concept state about every business transaction?
It has two aspects: increase and decrease in assets and liabilities
According to the dual aspect concept, which of the following is a valid transaction?
Increase in one asset, decrease in another asset
Which concept is considered the core of accountancy?
Dual aspect concept
Which of the following is the correct classification of revenue receipts?
Revenue receipts are shown on the credit side of the trading/profit and loss account.
Which of the following is an example of a revenue receipt?
Income from cash sales
Which of the following statements best describes the concept of capital and revenue transactions?
Capital transactions are recorded in the balance sheet, while revenue transactions are shown in the trading/profit and loss account.
Which of the following is a characteristic of capital expenditure?
It increases the revenue-earning capacity of the concern.
Which of the following is a characteristic of revenue expenditure?
It is incurred for carrying out the day-to-day activities of the business.
Which of the following is an example of a capital expenditure?
Purchase of a delivery vehicle
What is the primary purpose of revenue recognition in accounting?
To record the sale of goods and services
Which of the following is NOT considered a form of revenue?
Depreciation of fixed assets
Which of the following is the BEST definition of a fixed asset according to the text?
An asset held with the intention of being used for production or service provision
When did AS 11 (The Effects of Changes in Foreign Exchange Rates) become mandatory according to the text?
April 1, 2004
Which of the following is NOT a source of revenue mentioned in the text?
Depreciation of fixed assets
Which of the following is a characteristic of revenue?
Revenue includes interest, dividends, and royalties
Study Notes
Realisation Concept
- Profits should be accounted for only when realised, i.e., when a sale is affected or services are rendered.
- Revenue or profit should not be recognised until the asset is sold, even if its market value has increased.
- Revenue can be recognized before cash is received, but only if a legal right to receive cash is established.
Accrual Concept
- Revenues and costs should be recognised as and when they are earned or incurred, not when money is received or paid.
- This concept follows the mercantile system of accounting, not the cash system.
- Income and expenditure should be recorded in the period to which they belong, not in the period in which they are received or paid.
Dual Aspect Concept
- Every business transaction has two aspects: increase or decrease in assets and liabilities.
- Transactions can increase one asset and decrease another asset, or result in revenue receipt.
- Revenue receipts are cash inflows generated in the normal course of business activities, such as income from cash/credit sales or services rendered.
Capital and Revenue
- Capital transactions are recorded in the balance sheet, while revenue transactions are shown in the revenue statements (trading and profit and loss account).
- Capital expenditures are non-recurring, shown in the balance sheet, and increase the revenue earning capacity of the business.
- Revenue expenditures are recurring, shown in the revenue account, and do not increase the revenue earning capacity of the business.
Distinction between Capital Expenditure and Revenue Expenditure
- Capital expenditure is non-recurring, shown in the balance sheet, and increases the revenue earning capacity of the business.
- Revenue expenditure is recurring, shown in the revenue account, and does not increase the revenue earning capacity of the business.
Accounting Standards
- AS 10 defines a fixed asset as an asset held with the intention of being used for producing or providing goods and services, not held for sale in the normal course of business, and expected to be used for more than one accounting period.
- AS 11 deals with the effects of changes in foreign exchange rates, and is applicable to accounting for transactions in foreign currencies and translating financial statements of foreign operations.
Test your knowledge on revenue, which is the gross cash inflow from the sale of goods and services, and accounting for fixed assets as per AS 10. Learn about how revenue is earned from customers and clients and the accounting practices for fixed assets.
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