Question

What is the test for income recognition in a retail business when accrual accounting is used?

Answer 1

In case accrual accounting is used the recognition of income must be done by the organization only after all the following conditions are satisfied:

1. In case the organization is involved in selling goods then the goods should been sold and the ownership in the goods have been transferred to the buyer.
2. The risk and interest associated with ownership must be transferred to the buyers.
3. There is no uncertainty as to the collection of revenue from sale of goods.
4. In case of any uncertainty regarding the final receipt of such income then necessary provisions shall be made to provide for such expected loss in the amount of revenue.
5. In case of an organization providing services then services must have been provide either fully or in part.
6. Full or part payment for such services have been received by the organization.
7. There is no uncertainty regarding the final payment to be received for the services provided by the organization.

Only if all the above conditions are satisfied that an organization should recognize revenue in its books of accounts.