When should revenue be recognised? Are there exceptions to the general rule?
Revenue should be recognised when it is realised. According to the general rule, revenue is assumed to be realised when a legal right to receive it arises, i.e., when goods have been sold or a service has been rendered. For example, credit sales are treated as revenue on the day of sale, not when cash is received. Income such as rent, commission, or interest is recognised on a time basis.
Yes, there are exceptions to this general rule. In the case of construction contracts that take a long time (e.g., 2-3 years) to complete, revenue is recognised based on the proportionate amount of the contract completed by the end of the period. Similarly, when goods are sold on hire purchase, the amount collected in installments is treated as realised.
Explanation
The answer is derived from Section 2.2.7 'Revenue Recognition (Realisation) Concept'. The general rule states revenue is recognized when a legal right to receive it arises (sale of goods or rendering of service). The exceptions specifically mentioned in the text cover long-term construction contracts (proportionate completion) and hire purchase sales (collection basis).
Solution Steps
Step 1: Define the general rule of revenue recognition (Realisation Concept).
Step 2: Specify the timing (when legal right arises/goods sold/service rendered).
Step 3: Identify and explain the two specific exceptions provided in the text (Construction contracts and Hire purchase).