Realization Concept Assignment Help | Realization Concept Homework Help

The Realization Concept

[Revenue Recognition Principle]

The essential meaning of realization is that no profit or gain shall be recognized unless a change in asset or liability has become sufficiently definite and objective for recognition in the books of account. As the profit or gain means excess of revenues over expenses, the realization concept is related to: (i) meaning and measurement of revenue and (ii) timing for revenue recognition. Accounting Standard (AS)-9 provides: Revenue is the gross inflow of cash, receivable or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprises resources yielding interest, royalties and dividends. It means revenues are gross inflow or other increases of assets resulting from the profit directed (operating and non-operating) activities of the business enterprise. Revenue is produced by the sale of goods. Performance of service for a price also results in the production of revenue. The use of firm’s resources by others for a free also brings in revenue. However revenues do not include assets acquired by purchase, borrowings by the business entity and capital introduced by the owner(s). Thus revenue is measured by the charge made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration. The essence of the realization principle is the timing of the revenue recognition. Realization principle provides answer to the question by stating that revenue should only be recognized when both of the following conditions are met: (i) the earning process is essentially or substantially complete and; (ii) an exchange has taken place, that is, when the receipt of payment for the goods and services is reasonably certain. Realization principle provides some basic criteria which give legal rights to he receipt of money. The basic criteria are:

(a)    Measurability of asset value:

It means that increase in asset can be objectively measured. Liquid assets like cash or receivable (debtors and bills receivables) create no problem. Measurability also means that collectibility of cash is reasonably certain;

(b)    Existence of a transactions:

 It means exchange of goods or services for a price between the enterprise and some third or unrelated party, in which ownership in goods passes to the buyer for a consideration and

(c)    Substantial completion of the earning process:

 earning process means those business activities which are undertaken by the firm to earn profit such as purchase of goods or raw materials, manufacturing or selling of goods, (or rendering or services), allowing others (outsider) to use resources of firm like building, money, land and so on. The creation of goods and services then is completed in the sense that the necessary costs have been incurred or may be estimated objectively. The selling price can be determined only when earning process is either complete or is nearing completion. The working rule seems to be that the realization of revenue occurs at the time of exchange of goods and services for liquid assets. 

For more help in Realization Concept click the button below to submit your homework assignment