Question

1. Revenue is usually recognized at the point of sale, however under special circumstances other bases are used. Disregarding these special circumstances, discuss the merits of the following objections to the sales basis of revenue recognition:

1. It is too conservative because revenues are earned throughout the production process
2. It is not conservative enough because accounts receivable do not represent disposable funds, sales returns and allowances may be made, doubtful accounts may be incurred in a later period.

Answer 1

i) The most important merit to follow the revenue recognition standard is because it ensures that your books show what your profit and loss margin is like in real time. It's important to maintain credibility for your finances. Financial reporting helps keep your transactions aligned. Throughout the production process we'll be able to find the actual profit and loss.

ii) But, in the accrual based accounting thought revenue is recognized on the completion or sale of goods, there may be problem where the payment would not be recieved by the business and which we may be able to records on the later part of the accounting as doubtful debts in case of cash basis of accounting it becomes difficult to recognize the doubtfull debts as the revenue has not been recorded and it becomes difficult to identify the doubtful debts.