Question

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No handwriting or photo (tax accounting) To make income taxable, income must be realized and recognized....

No handwriting or photo (tax accounting)

To make income taxable, income must be realized and recognized. Explain in your own words the difference between income realization and income recognition, then provide a short numerical example to indicate the difference

Expert Solution

Difference between income realization and income recognition-

Income realization:

1. Income can be realized only when the goods and services has been delivered to the end user whether in case of individual or corporate bodies.

2. Realized income is the income which is earned by the business firms.

3. Basically cash method is used by the organisations for income realization. This method is advantageous from taxation point of view. Untill the income is realized, there is no need to pay taxes on outstanding bill invoices.

4. It doesn't follow generally accepted accounting principles (GAAP).

5. In income realization the management will be able to find out the revenue earned and cash from the operation.

Example-

Suppose a consumer of big bazar retail ltd. Paid £ 2000 in advance for her design products. In this case the income is not realized for big bazar until the work on the desired product is fully completed.

Income recognition:

1. Income is recognised after it is realized. In this case there is nothing to relate with when good and services are rendered.

2. It is the income which is recorded by the business firms in the books of accounts after its realization.

3. Accrual method is used by many organisations to record income recognition. It is flexible and consize. There is no tax advantages in this method.

4. It follows the GAAP principles to have complete control on the amount of funds recognized which ensures transparent financial reports to the client.

5. There is no clue for the management to make a comparison between cash from operations and income recognized.

Example-

HSBC global services received income recognition of amount £1000 in 2018, even though it was realized in the previous accounting period. The basic characteristics of income recognition is to relate last year income realization.

ekkarill92 answered 5 hours ago

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