Question 1 (a)

The matching principle; when revenue is recognised

4 marks

Time to write
About 8 minutes

From an older CBCS paper

Question

Question 1 (a) · 4 marks

Explain the 'Matching Principle'. When is revenue said to be recognised ? 4

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

8 minfor 4 marks

Read from the question

  • ExplainEach point stated, then explained in a line or two.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Matching principle, with its consequences 2 marks 3 min
  3. 2 When revenue is recognised (AS 9) and the exceptions 2 marks 3 min
  4. Check: every ask answered, key terms underlined 1 min

Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.

Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Matching principle. Profit for a period is found by matching the revenues of that period with the expenses incurred in earning them. The first step is to ascertain what revenues are to be recognised in the accounting period; the second is to determine the expenses associated with those revenues. So:

  • the cost of goods sold, not the cost of all goods bought, is set against the period's sales; unsold stock is carried forward as an asset to be matched with next period's revenue;
  • expenses of the period are recorded whether paid or not (outstanding expenses), and payments for later periods are carried forward (prepaid expenses);
  • the cost of a fixed asset is spread over the years that benefit from it, through depreciation.

Revenues are measured on the accrual basis: they belong to the year in which they are earned, whether or not cash is received in that year.

When is revenue recognised? Under the realisation (revenue recognition) concept, revenue is recognised when it is earned, not when an order is received or cash is collected. AS 9 sets the conditions:

  1. Sale of goods: when the seller has transferred to the buyer the property in the goods, or all significant risks and rewards of ownership, keeping no effective control, and no significant uncertainty exists about the amount of the consideration.
  2. Rendering of services: as the service is performed, by the completed service contract or the proportionate completion method, when no significant uncertainty exists about the consideration.
  3. Interest, royalties and dividends: interest on a time-proportion basis, royalties on an accrual basis under the agreement, dividends when the owner's right to receive payment is established.
  4. If at the time of the claim ultimate collection is not reasonably certain, recognition is postponed.

Exceptions allowed by the realisation concept: revenue may be recognised earlier where it can be measured objectively before the sale (for example, mining, when the metal is mined); and, as point 4 says, its recognition is postponed where ultimate collection is not reasonably certain.

Where the 4 marks sit

#ComponentMarks
1Matching principle, with its consequences2
2When revenue is recognised (AS 9) and the exceptions2
Total4
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