Understanding the Realisation Concept in Accounting Principles
The Realisation Concept in accounting revolves around the recognition of revenues when they are legitimately earned, emphasising the actual receipt of cash or the establishment of a legal right to receive payment. This concept applies to various scenarios such as sales, the sale of assets, or the provision of services.
According to the Realisation Concept, revenue should be acknowledged in the financial records during the period in which goods are sold or services are rendered.
The sale is considered complete when the ownership of goods transfers to the buyer, and the buyer becomes legally obligated to make the payment. Additionally, the amount recognised as revenue should be reasonably certain to be realised.
For instance, if goods are sold at a discounted price, revenue is recorded at the actual sale price rather than the list price. Similarly, when sales are made on credit, the estimated amount of bad debts are treated as an expense, ensuring that the reported revenue reflects the anticipated realised amount.
In simpler terms, revenue is realised either when cash is received or when a legal right to receive cash is established for the sale of goods or services. The key point is that revenue is recognised at the moment of delivering goods or services.
Significance of the Realisation Concept:
The Realisation Concept contributes to the objectivity of accounting information by ensuring that revenues are only recorded when legitimately earned.
Transactions are recorded based on the physical delivery of goods to the buyer, aligning with the principle that revenue should be recognised when goods or services are effectively provided.
In summary, the Realisation Concept in accounting underscores the importance of recognising revenue only when it is genuinely earned. This principle helps maintain the accuracy and reliability of financial records, providing a clear picture of a business's performance based on actual sales of goods and services.