Question

When is revenue recorded on the income statement? Is it possible to have a million dollars in net income on the income statement and no cash in the bank?

Answer 1

Revenue is recognised in the books of account when the revenue is earned. This means revenue recorded in income statement when activities required to generate the revenue is completed.

As per IFRS 15, there is a five step model that describes how and when revenue has to be recognised. The ultimate logic is that revenue recorded when sale of good or service has been affected and consideration is legally received or receivable.

In the accrual system of accounting, it is possible to have millions in net income but none in Bank balance. As here, we account on the basis of revenue earned and expenses incurred and not actual cash receipts and cash payments.

For example, the company made credit sales of millions of dollars, but didn't receive any payment from its customers till year end. Hence, income will come up in income statement but company will have no bank balance. But, will have debtors in its balance sheet.