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Revenue may also be recognised overtime. Give one example of business activities in which revenue is...

Revenue may also be recognised overtime. Give one example of business activities in which revenue is recognised over time. Explain the rationale in recognising revenue over time instead of the point of sale basis.
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Answer #1

Revenue is recognized over time in cases where the contract of sale or service is spread over a longer period i.e. more than one financial year. One most suitable example of revenue recognition over time would be involving construction contracts where in the contracts usually spread over 4-5 financial years. In these type of contracts, the revenue is recognized either on the basis of completion of contract. The revenue to be recorded is based on the percentage of completion. The rationale behind this method of recognition is to meet the matching principle i.e. matching revenue with costs and also ownership basis. Revenue is recognized only when the physical ownership of the asset is transferred or the service is totally completed. This is done to ensure that the cash collectibility is reasonably assured and follows the matching principle.

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