The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to determine when to include a transaction in the sales figure for the period. When the goods have been: dispatched, invoiced, delivered, paid for. Give reasons for your answer.
(b) Invoiced
According to the Revenue Recognition (Realisation) Concept, revenue should be included in the accounting records only when it is realised. Revenue is assumed to be realised when a legal right to receive it arises, i.e., when goods have been sold or service has been rendered.
In practice, invoicing tends to be used as the basis for including a transaction in the sales figure. This is because invoicing establishes the legal right to receive payment from the customer. Once goods are invoiced, the sale is considered complete and enforceable.
The other options are incorrect because: dispatched and delivered do not necessarily create a legal right to receive payment, while paid for is incorrect as credit sales are recorded on the day sales are made, not when money is received from the buyer.
Explanation
The textbook clearly states that 'revenue is assumed to be realised when a legal right to receive it arises' and that 'credit sales are treated as revenue on the day sales are made and not when money is received from the buyer.' Invoicing creates this legal right to receive payment, making it the point at which revenue is recognized. The question tests students' understanding of when revenue recognition occurs under the realisation concept.
Solution Steps
Step 1: Identify the key principle - revenue is realised when legal right to receive it arises
Step 2: Evaluate each option against this principle
Step 3: Conclude that invoicing establishes the legal right to payment, making it the correct answer