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Revenue Recognition

RAJU (LEARNER) (1089 Points)

24 June 2010

Dear Members,

In case of Transport Industry, what is the regular practice of recognising the Income where service would not have been completed as on the Balance Sheet date.

Suppose a vehicle carrying goods has started movement on 25-03-2010 which has reached its destination on 10-04-2010, whether the income will be recognised on the date of movement, on reaching the destination or will it be on proportionate basis?

Thanks & Regards

Dharmaraju

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15 Replies

Ankit CA and CS (Manager - Accounts) (204 Points)
Replied 24 June 2010

I thnk revenue recognition is purely based on policy of the company..no specific rule...so no point of discussion ..u hav to validate companies policy only thts it..

Kalpesh Chauhan, (Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com)) (8310 Points)
Replied 24 June 2010

I think it should be based on cash base accounting rather than mercantile system.

Hence revenue will be recognised on the date when money is received and should be accounted in that year in which amount is received.

1 Like

Max Payne (employed) (2569 Points)
Replied 24 June 2010

I think its fair to book unearned revenue on proportionate basis in the P&L,

provide for the same on 31st match as Provision for unearned revenues (under CL and Provisions, P&L)

You can reverse the unearned revenue on 01st april next year, and revenue entry can be passed on April 10th.

Again, pls see the materiality of the amount.

If its material then i suggest to book unearned revenue...

1 Like

RAJU (LEARNER) (1089 Points)
Replied 24 June 2010

Thanks for the replies....

A company is required to follow the Accounting Standards and the company's policies can not override the provisions of Companies Act.

It is mandatory for the Company to follow Accrual System of Accounting. So, I believe following cash system for recognising the income will not be correct.

I agree with you Lucifer... But it will be very helpful if this stand can be justified with reference AS 9. Since the transporter gets the right to claim the sum only on completion of service, will it be correct to recognise the income proportionately?

Thanks & Regards

Dharmaraju

Amir (Learner) (4016 Points)
Replied 24 June 2010

Hi Dharmaraju,

Dont think as if I am following you.....:)

In terms of AS-9, Only Completed service contract menthod can be applied in this case since the act consisted of performing only one service and hence proportionate completion method cannot be applied.

But, AS-1 says, one of the consideration in selection of accounting policy is "Materiality", so the above reply by "Lucifer" stands justified......

Anyways, I dont think that proportionate completion will be applied...I m not finding it logical.....:(

RAJU (LEARNER) (1089 Points)
Replied 24 June 2010

Hi Amir,

I would like to `Welcome` you if you are not following me as I am very much sure that my queries will be resolved if you do so....

I agree with Lucifer and you regarding the materiality.... But since the instances I have come across are large, I believe it will impact the statements substantially.

So I can conclude that the company needs to recognise the revenue on completion of service? Consequently, the expenses booked on payment to sub-contractors towards transportation may also be reversed considering the matching concept and liability to pay for the work sub-contracted....

Thanks & Regards

Dharmaraju

Amir (Learner) (4016 Points)
Replied 24 June 2010

Regarding that "welcum"......Thanks & gud reply....he he.... Gud humor....!

On a serious note, I feel Yes, completed contract method should be applied.

Regarding second question, I think its answer will follow the first one so "Yes" again from my side.

RAJU (LEARNER) (1089 Points)
Replied 24 June 2010

It is a Fact Amir and not Humour. I mean it....

Thank you Sir.....

Regards

Dharmaraju

Kalpesh Chauhan, (Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com)) (8310 Points)
Replied 24 June 2010

All AS at one place

(Guest)

cash base accounting should be used

RAJU (LEARNER) (1089 Points)
Replied 24 June 2010

Hi Radhe,

The issue is clarified. The revenue has to be recognised on completion of Service and it is not on Cash basis.

puneet khurana (finance) (75 Points)
Replied 25 June 2010

I think revenue should be booked if performance has been completed i.e. on FY. 2010-11. till than it should be shown in notes to accounts in fy 2009-10

Sachin kumar (CA Final) (63 Points)
Replied 26 June 2010

In my opinion the revenue should be booked only on completion of service as the right to recieve income is earned only when the service is completed till then if the amt is material it can be showed in notes to accounts.