I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

367 

QUESTION 

Revenue

 

Discuss under what circumstances, if any, revenue might be recognised at the following stages of a sale. 

(a) 

Goods are acquired by the business which it confidently expects to resell very quickly 

(b) 

A customer places a firm order for the goods 

(c) 

The goods are delivered to the customer 

(d) 

The customer is invoiced for the goods 

(e) 

The customer pays for the goods 

(f) 

The customer's cheque in payment for the goods is cleared by the bank 

ANSWER 

(a) 

A sale must never be recognised before the goods have even been ordered by a customer. There is 

no certainty about the value of the sale, nor when it will take place, even if it is virtually certain 

that goods will be sold. 

(b) 

A sale must never be recognised when the customer places an order. Even though the order will 

be for a specific quantity of goods at a specific price, it is not yet certain that the sale transaction 

will go through. The customer may cancel the order, the supplier may be unable to deliver the 

goods as ordered or it may be decided that the customer is not a good credit risk. 

(c) 

A sale will be recognised when delivery of the goods is made only when: 

(i) 

The sale is for cash, and so the cash is received at the same time. 

(ii) 

The sale is on credit and the customer accepts delivery (eg by signing a delivery note). 

(d) 

The critical event for a credit sale is usually the despatch of an invoice to the customer. There is 

then a legally enforceable debt, payable on specified terms, for a completed sale transaction. 

(e) 

The critical event for a cash sale is when delivery takes place and when cash is received; both 

take place at the same time. 

It would be too cautious or 'prudent' to await cash payment for a credit sale transaction before 

recognising the sale, unless the customer is a high credit risk and there is a serious doubt about 

their ability or intention to pay. But in that case, why would the business risk despatching the 

goods? 

(f) 

It would again be overcautious to wait for clearance of the customer's cheques before recognising 

 sales revenue. Such a precaution would only be justified in cases where there is a very high risk of 

the bank refusing to honour the cheque.