Discuss the accounting treatment while exchanging of goods and services Discuss

Question

Discuss the accounting treatment while exchanging of goods and services Discuss the revenue recognition criteria of Telecommunication company selling talk time through scratch cards Explain the revenue recognition process in case of subscription received from newspapers and magazines Discuss the criteria of revenue recognition with examples when goods are sold under "Sale or Return" Discuss the revenue recognition principles for Media Company when the advertisements are aired even if the payment is not received or received in advance

Explanation / Answer

Answer(1):

Case(I): When there is an exchange of goods or services for goods or services of similar nature and value then such an exchange is not treated as a transaction that generates revenue. Hence, it won't be accounted.

Case(II): When there is an exchange of goods or services for goods or services of dissimilar nature and value then such an exchange is treated as generating revenue. In this case the revenue must be recognised and accounted at the fair market value.

Answer(2):

When a telecommunication company sells talktime through scratch cards, no revenue is recognised at the time when the scratch cards are sold to dealers. But the revenue is recognised when the subscriber makes a call and consumes the talktime.

Answer(3):

When accrual basis of Accounting is being followed for revenue recognition, income that pertains to those goods or services that have been delivered or provided during the accounting period should be recognised as 'income'in the income statement. The remaining advances received for period for which no goods have been delivered or no services have been rendered should be treated in the form of current liability.

In case of subscription received from newspapers and magazines we must recognise the revenue when the actual consideration is received regardless of the actual performance of the service or delivery of the product.

Journal Entries:

(a) Cash A/c Dr. xxxx

   To Unearned revenue A/c. xxxx

(Being advance payment received for the subscription of magazines and newspapers)

(b) At the time of delivery,

   Unearned revenue A/c Dr. xxxx

   To sales revenue A/c. xxxx

Answer(4):

In case of goods sold under the "sale or return", the goods are sent by the supplier to the customer with an understanding that customer does not have to pay for such goods until these goods are used or sold by the customer. If such goods are not sold or used then customer will return such goods back to supplier.

Now, the sale or use may depend upon the contract between the supplier and customer and thus this make the situation complex and technical.

For Example: Customer was able to sell some part of the shipment and now wants to send back the rest to supplier. But the supplier says that the sale of entire package has occurred and the rest of the goods now belong to the buyer.

We have to understand the basic revenue recognition criteria given by International Accounting standard IAS 18 Revenue. According to IAS 18 para 14, revenue on sale of goods shall be recognised only when the following conditions are fulfilled:-

(a) Transfer of the significant risks and rewards of ownership of the goods to the buyer.

(b) No control of the supplier with the ownership nor effective control on the goods sold.

(c) Amount of revenue can be measured reliably.

(d) Economic benefits associated with the transaction will flow to the supplier; and

(e) Cost incurred or to be incurred in respect of the transaction can be measured reliably.

Therefore, the above mentioned criteria must be followed to recognise the revenue under "Sale or Return".

Answer(5):

A media company recognises revenue when the advertisements are aired even if the payment is not received or where payment is received in advance.

The revenue recognition principles that are discussed in answer(4) will also be followed by Media company.

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