Question

Revenue Recognition

Using Word or Excel, create a diagram or model that represents the series of criteria found in CON5.

Using Word or Excel, create a diagram or model that represents the process of the revenue recognition process.

Guidance:

Diagram the process of revenue recognition.

Start with the process.

What starts the process?

Think through from the business perspective what happens when you purchase a good or service?

What are the journal entries?

What are the accounts?

What happens to the accounts?

What’s the impact on the financial statements?

Which financial statements?

Answer 1

Recognition of revenue
In case of sale of goods
Start of the process (1st)	Sale of goods
2nd	Transfer of ownership in the goods to the buyer
3rd	Dispatch of goods to the buyer's premises
4th	No uncertainty regarding the final receipt of payment
5th	Recognition of revenue

In case of purchase of goods from the perspective of business the same is charged against revenue to calculate the amount of profit and loss of an organization.

  

Date	Account titles and explanations	Debit ($)	Credit ($)
In case of sale of goods	Bank / Cash / Accounts receivable	***
	Sales		***
	(Being sales made)
In case of purchases of goods	Purchases	***
	Bank / cash / Accounts payable		***
	(Being purchases made)

Accounts

Cash

Bank

Accounts receivable

Sales

Purchases

In case of sales: Bank or cash or accounts receivable are debited and the sales account is credited.

In case of purchase: Purchase account is debited and bank or cash or accounts payable is credited.

Impact on financial statements:

Statement of profit and loss: Sales is credited to the profit and loss account. Purchase is debited to the profit and loss account. Sales increase the amount of profit whereas purchase decreases profit of the organization.   

Balance sheet: With sales cash / bank/ accounts receivable are increased and inventory is reduced. In case of purchase cash/ bank and inventory decreases whereas accounts payable increases.