BACHELOR OF BUSINESS ADMINISTRATION

2021-2024
SEMESTER-I
DIVISION-A
ACCOUNTING STANDARD-9
REVENUE RECOGNITION
SUBJECT:FINANCIAL ACCOUNTING

GROUP MEMBERS:
Dollyben Panchal 1018
Tejasvi Chhabra 1036
Tushar Narang 1037
Udbhav Yadav 1038
Vaishali Jain 1039
 INDEX

S.NO CONTENTS PAGE

NO.
1. INTRODUCTION 3

2. SALE OF GOODS 4

4
3. RENDERING OF GOODS 4

4. THE USE BY OTHERS OF ENTERPRISE RESOURCES 5

YIELDING
INTERES,ROYALTIES & DIVIDENDS

5. EFFECTS OF UNCERTAINITIES ON REVENUE 5

RECOGNITION

6. CASE STUDY 6

7. CONCLUSION 8
 Introduction
1.The revenue recognition requires that the revenue for a business transaction should be
included in the accounting records only when it is realised.
2. Revenue recognition emphasises on the timing of recognition of revenue in the statement
of profit and loss of an enterprise.
3.As per the AS-9 "Revenue Recognition is the gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of an enterprise from the sale of
goods, rendering of services & from various other sources like interest, royalties &
dividends”.
According Standard 9 is concerned with the recognition of revenue arising in the course of
the ordinary activities of the enterprise from:
•From Sale of goods
•From Rendering of services, and
•From the use by others of enterprises resources yielding interest, royalties and dividends
4. Important consideration of this accounting standard are - the amount of revenue arising
from a transaction is usually determined by an agreement between the parties involved in the
transaction.
5. When uncertainties arise regarding the determination of the amount or its associated costs,
these uncertainties may influence the timing of the revenue.
6. Revenue has to be measured by the amount charged to the clients for the sale of goods and
services. However, in the case of the agency relationship, the revenue has to be measured by
the amount charged for commission and not on the gross inflow of the cash, receivables or
other consideration. 

However this accounting standard does not deal with revenues resulting from:
(I) Revenue arising from construction contracts (subject matter of AS-7);
(II) Revenue arising from hire purchase and lease agreements ( subject matter of AS-19);
(III) Revenue arising from government grants and other similar subsidies ( subject matter of
AS-12);
(IV) Revenue of insurance companies arising from insurance contracts.

Following transactions are also not covered within the definition of revenue as per AS-9:
(I) Realised/ unrealised gain resulting from disposal/ holding of fixed assets. Gain arising
from either sale of fixed assets or appreciation in the value of fixed assets.
(II) Unrealised gains resulting from the restatement of the carrying amount of an obligation.
(III) Realised gain resulting from the discharge of obligation at less than its carrying amount.

(IV) Realised or unrealised gain resulting from changes in the foreign exchange rate during
the translation of foreign currency financial statements.

(V) Unrealised gain due to change in the value of the current assets and increase in the value
of herds, agricultural or forest product.

SALE OF GOODS

Sometimes, the collection of receivables involves a high level of risk. If there is a high degree
of uncertainty regarding collectibility then a company must defer the recognition of revenue.
There are three methods which deal with this situation:

 Installment sales method allows recognizing income after the sale is made, and
proportionately to the product of gross profit percentage and cash collected
calculated. The unearned income is deferred and then recognized to income when
cash is collected.

 For example, if a company collected 45% of total product price, it can recognize
45% of total profit on that product.

 Cost recovery method is used when there is an extremely high probability of

uncollectable payments. Under this method no profit is recognized until cash
collections exceed the seller's cost of the merchandise sold.

For example, if a company sold a machine worth Rs.10,000 for Rs.15,000, it can
start recording profit only when the buyer pays more than Rs.10,000. In other
words, for each dollar collected greater than Rs.10,000 goes towards your
anticipated gross profit of Rs.5,000.

 Deposit method is used when the company receives cash before sufficient
transfer of ownership occurs. Revenue is not recognized because the risks and
rewards of ownership have not transferred to the buyer.

RENDERING OF SERVICES

Revenue recognition of services depends as the service is performed. This is further divided
into two ways:

Proportionate Completion Method: This method of accounting recognizes revenue in the

statement of profit & loss proportionately with the degree of completion of each service. Here
the service completion consists of the execution of more than one act. Revenue is recognized
with the completion of each such act.

Completed Service Contract Method: This method of accounting recognizes revenue in the
statement of profit & loss only when the rendering of services under a contract is completed
or substantially completed. How is revenue recognised in rendering of services? Rendering of
Services When an entity provides a service to a customer, the rules for recognising revenue depend
on whether the contract can be estimated reliably or not. When the outcome can be measured
reliably, the contract revenue must be recognised by reference to the stage of completion of the
contract.

THE USE BY OTHERS OF ENTERPRISE RESOURCES YIELDING

INTEREST,ROYALTIES AND DIVIDENDS
1. INTEREST: Charges for the use of cash resources or amount due to company.
 Revenue is recognized on the time proportion basis after taking into account the
amount outstanding and the rate applicable.
For Example: If the interest on FD is due on 30th June and 31st Dec. On 31st March
when the books will be closed, though the interest for the period of Jan-March will be
received in June, still we have to recognize the revenue in March itself.

2. ROYALTIES: • Charges for the use of intangible assets such as know-how, patents,
copyrights or trademarks etc.
• Revenue is recognised on accrual basis in accordance with the terms of the relevant
agreement.
For Example: If the royalty is payable based on the number of copies of the book, then it
has to be recognised on that basis only.
.
3. DIVIDENDS: • Rewards from the holding of investments in shares.
 Revenue is recognised in the statement of P&L when the owner’s right to receive
payment is established.

It is only certain when the company declares the dividends on the shares and the directors
actually decide to pay the dividends to their shareholders.

EFFECT OF UNCERTAINITIES ON REVENUE RECOGNITION:

Where the ability to assess the ultimate collection with reasonable certainty is lacking at the
time of raising any claim, revenue recognition is postponed to the extent of uncertainty
involved.

In such case: When the uncertainty relating to collectability arises subsequent to the time of
sale or the rendering of the service, it is more appropriate to make a separate provision to
reflect the uncertainty rather than to adjust the amount of revenue originally recorded.
An essential criterion for the recognition of revenue is that the consideration receivable for
the sale of goods, the rendering of services or from the use by others of enterprise resources is
reasonably determinable. When such consideration is not determinable within reasonable
limits, the recognition of revenue is postponed.

Example: A sells goods to B for Rs. 1 Lakh on 15th Apr However, after the sale made, it was
found that only Rs.80,000 can be claimed from B.

In this case, revenue shall be recognized up to 7 80,000 (as there is reasonable uncertainty
about the Collectability of F 20000 which is remaining)
A separate provision shall be made in the books of account to reflect the uncertainty of
Rs.20000

CASE STUDY
Question:

a)Reliance Ltd. sold farm equipments through its dealers. One of the conditions at the time
of sale is, payment of consideration money in 14 days and in the event of delay interest is
chargeable @ 15% p.a. The company has not realised interest from the dealers in the past.
However, for the year ended 31.3.2017, it wants to recognise interest due on the balances due
from dealers. The amount is ascertained at Rs.9 lakhs. Decide whether the income by way of
interest from dealers is eligible for recognition as per As-9 ?

b) Reliance Ltd is laying a city gas pipe line for its client .
REL. Total revenue of the project is Rs 40,00,000.
Reliance has incurred cost up to 31 st March,2017 Rs15,00,000 and the company is expecting
that Rs10,00,000 more will be required to complete the project.
Up to 31st Dececmber,2016,REL has approved Rs12,50,000 of expenditure.
Reliance is confident that the balance 2,50,000 ( Rs.15,00,000 – Rs.12,50,000) will be
approved by REL When there engineer will inspect the work during the 1st week of April,
2017.
c)ITC Ltd. used certain resources of Reliance Ltd. In return, Reliance Ltd. received ~ 10
lakhs and ~ 15 lakhs as interest and royalties respectively from ITC Ltd. during the year
2016-17.You are required to state whether and on what basis these revenues can be
recognised by Reliance Ltd.

Answer:

a)As per AS-9, recognition of revenue requires that revenue is measurable and it would not
be unreasonable to expect ultimate collection. Where the ability to assess the ultimate
collection with reasonable certainty is lacking at the time of raising any claim, revenue
recognition is postponed to the extent of uncertainty involved. In such cases, it may be
appropriate to recognise revenue only when it is reasonably certain that the ultimate
collection will be made.

In this case, the company should not recognise ~ 9 lakhs as interest income for the year
ending on 31.3.2017 because there is uncertainty in respect of collection of interest. The
company should postpone the recognition until the collection of interest is made.

b)
(1) Rs.12,50,000 as expenses ( the amount approved )
(2) Rs.20,00,000 as (accrued revenue)
12,50,000 ×40,00,000
25,00,000

c) Revenue is measured by the charges made to customers for the use of resources by them.
The use by others of such enterprise resources gives rise to :

(i) Interest ---- charges for the use of cash resources or amounts due to the enterprise.Interest
accrues, in most circumstances, on the time basis determined by the amount outstanding and
the rate applicable.

(ii) Royalties ---- charges for the use of such assets as know-how, patents, trade marks and
copyrights.Royalties accrue in accordance with the terms of the relevant agreement and are
usually recognised on that basis unless, having regard to the substance of the transactions, it
is more appropriate to recognise revenue on some other systematic and rational basis.

Here, Reliance Ltd. should recognise ~ 25 lakhs as revenue for the year 2016-17.
 CONCLUSION
We would like to express our special thanks of gratitude to our Professor Paramjeet Kaur
who gave us the golden opportunity to do this wonderful project on the topic of accounting
standard - 9 revenue recognition , which also helped us in doing lot of research and we came
across so many new things . We are really thankful to our teacher and had a great learning
experience . I would also like to thank myb group members who were really supportive and
contributed a lot to this project .

This project is a detailed study of Accounting standard – 9 Revenue recognition and tells us
about its functions and importance . It briefly explains us about functions like sale of goods in
which it tells us about Installment sales method , cost recovery method and deposit method
.The project also tells us about the second function Rendering of services in which it explains
about proportionate completion method and completed service contract method . It also tells
about the use by others of enterprise resources yielding Interest , Royalties and Dividends
and effects of uncertainities on revenue recognition.

THANK YOU!