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Profit and Loss Account

Profit and Loss Account. Revenue Recognition. Revenue is the income of the business from its operating activities i.e sale of goods, rendering services or allowing others to use the entity’s resources. It may be called sales, fees, interest, dividend, royalties etc.

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Profit and Loss Account

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  1. Profit and Loss Account

  2. Revenue Recognition Revenue is the income of the business from its operating activities i.e sale of goods, rendering services or allowing others to use the entity’s resources. It may be called sales, fees, interest, dividend, royalties etc. When and how should a revenue be recognised ??? General Principles • If an inflow of economic benefits results in a corresponding liability, then it it is not revenue. • When consideration is received other than in cash form, the fair value of the consideration should be received • In case of sale of goods revenue can be recognised if significant risks and rewards are transferred to the buyer e.g ABC Ltd. Sold machinery costing Rs.10.00 lacs to XYZ Ltd. As per the contract, the machinery has to be installed and commissioned by ABC Ltd.

  3. 6. In case of sale on approval basis, revenue should be recognised only when the customer has approved the same or reasonable period has elapsed 7. In case of hire purchase/ instalment sales, sale price ( excluding interest ) should be recognised as revenue 8. In case of services, revenue should be recognised to the extent of services completed. e.g a) revenue from arranging plays / performances should be recognised when the event is over b) Subscription fees should be proportionately recognised over the period of subscription when the service is provided • Royalties should be recognised over the period of agreement. • Term fees should be recognised over the term period. • Membership fees can be recognised as revenue on receipt but if such fees entitle the members some services, it should be recognisedw.r.t timing and value of services provided.

  4. Government grants if revenue in nature should be recognised over the period necessary to match them with related costs. If it is received for some expense or losses already incurred then it should be recognised when it becomes receivable. • If a grant is received in kind then fair market value of both grant and asset should be considered. The income should be deferred over the life of the asset E.g a) ABC Ltd. Receives a grant of Rs.400000 for cleaning the land in the vicinity of its factory. The work may take two years. How should the revenue be recognised. b) ABC Ltd. receives a subsidy of Rs.100 per kg of fertiliser. During the year 2009-10 it sold 500 kgs of fertilisers. However the subsidy was received in Dec’10. Should it recognise subsidy as revenue for the year 2008-09 ?

  5. Class exercise • A Ltd. supplied engines to B Ltd. For Rs.10.00 lacs on 10.03.10. It also has another contract with B Ltd. for installation of engines. The installation was completed on 12.4.10. Can A Ltd. recognise the revenue for the year 2008-09 2. A Ltd. Sold some goods to B Ltd on 25.03.10 for Rs.50000 However B Ltd. did not take delivery of goods immediately and requested A Ltd. to keep the goods in their godown for some days. The godown caught fire on 30.03.10. The accountant of A Ltd. recorded Rs.50000 as a loss. Is he correct in doing so ?

  6. The factory of ABC Ltd. faced a flood causing serious damage to the building. The company incurred an expenditure of Rs.500000 to put a roof on the building. How should the expenditure be treated in Accounts

  7. Pollution Control Dept. reimburses 25% of the pollution remedial cost As per Environmental law manufacturing companies have to remedy the damage caused by its manufacturing activities. Z Ltd. a hazardous chemical manufacturing unit incurs an expenditure of Rs. 20 lacs towards the same. As at the year end it has not yet received any reimbursement. Can it recognise the reimbursement receivable in accounts.

  8. Certain typical entries • Loss of stock • Distribution of goods as free samples • Bad debts and recovery of bad debts • Sales tax on sales • Sales tax on purchases • Income tax & TDS • Payment for imports and exports – differences in forex rates • Appropriation of profits

  9. A appoints B as his agent fro selling goods for a commission of 5% on sales made. The agent made a sale of Rs.300000 during the year. What should be the amount of commission actually paid to the agent. ( TDS 5%+sc+e.cess) Also discuss the accounting treatment in the books of A & B

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