Page 25 - Book-keeping for Secondary Schools Student’s Book Form One

Basic principles of Book-keeping

November on manufacturing the goods, Once these criteria are met, revenue should
with the revenue generated in February be recognised in the accounting records.
when the products are sold. The amount recognised is typically the
fair value of the consideration received
Revenue recognition principle or receivable in exchange for the goods
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This is a fundamental accounting principle or services provided. The revenue can
that determines when and how revenue be recognised at a point in time (for
should be recognised or recorded in the example, when the goods are delivered)
financial statements. It provides guidance or over time (for example, as services are
on when to recognize revenue and how to performed). It is important to note that
specific industries or transactions may
measure it. It also ensures that revenue is have additional guidance or standards for
reported accurately and in the appropriate revenue recognition, such as long-term
period. According to the revenue recognition construction contracts or software sales.

principle, revenue should be recognised These industry-specific rules may provide
when it is both realised or realisable and further criteria or guidelines to determine
earned. This occurs when the following when revenue should be recognised.
criteria are met:
(a) Identification of the contract: There In summary, the revenue recognition
should be a legally enforceable agreement principle insists on recognising revenue

between the seller and the buyer, outlining in the books when activities involving
the rights and obligations of both parties. sale of goods or service have reasonably
been performed, amount is known and has
(b) Delivery of goods or services: The seller been collected or is reasonably expected
has transferred control of the goods or to be collected.
services to the buyer.
Accrual basis accounting principle
(c) Determination of the transaction price: This is the method of recording and

The transaction price is determined and reporting financial transactions based on
can be reasonably estimated. It includes when they occur, regardless of the timing
consideration received or expected to be of cash inflows or outflows. In the accrual
received from the buyer in exchange for basis, revenue is recognised when it is
the goods or services. earned, and expenses are recognised when

(d) Collectability probability: It is probable they are incurred, regardless of when cash
that the seller will collect the amount he is received or paid. The key principles of
or she is entitled to receive from the the accrual basis of accounting include:
buyer. (a) Revenue recognition: Revenue is
recognised when it is earned, meaning

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