How do you use the concept of revenue recognition in the determination of the income of a business concern? Explain, giving examples.

1. Sale of Goods: Under AS-9, revenue from the sale of goods is generally recognized when all the following conditions are satisfied:

   a) The significant risks and rewards of ownership have been transferred to the buyer. b) The seller retains no effective control over the goods sold. c) The amount of revenue can be reliably measured. d) It is probable that the economic benefits associated with the transaction will flow to the seller. e) The costs incurred or to be incurred regarding the transaction can be reliably measured.

   For example, a manufacturing company sells goods to a customer. Revenue is recognized when the goods are delivered, and the buyer assumes the risks and rewards of ownership, such as taking physical possession and assuming the costs of transportation.

   

2. Rendering of Services: AS-9 provides specific criteria for recognizing revenue from the rendering of services. Revenue is generally recognized as the service is performed if the following conditions are met:

   a) The amount of revenue can be reliably measured. b) The stage of completion of the service can be determined reliably. c) The costs incurred or to be incurred regarding the service can be reliably measured. d) It is probable that the economic benefits associated with the service will flow to the seller.

   For instance, a consulting firm provides services to a client over several months. Revenue is recognized proportionally as the services are performed, based on the stage of completion determined by appropriate methods such as the percentage-of-completion method or the completed service contract method.

3. Other Transactions: AS-9 also covers revenue recognition for various other transactions, such as interest, royalties, and dividends. It provides specific principles and guidelines for recognizing revenue in these scenarios, ensuring that revenue is recognized when it is reasonably certain and can be reliably measured.

Businesses operating in India should adhere to AS-9 while preparing their financial statements to determine their income accurately and comply with the applicable accounting standards.