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The Realisation concept dictates that revenue from business transactions should only be recorded in the accounting records when it is realised. Realisation refers to the establishment of a legal right to receive money. For instance, selling goods constitutes realisation, while merely receiving an order does not.
Revenue is recognised when cash is received or when there is a legal entitlement to receive cash from the sale of goods or services.
Consider the following examples for clarity:
ABC Jewellers received an order to supply gold ornaments worth ₹7,00,000. They supplied ornaments worth ₹4,00,000 by the end of 31st March 2024, with the remaining ornaments supplied in April 2024.
Let's analyse these examples to determine the accurate amount of revenue realised:
For ABC Jewellers the revenue for 2023-24 is ₹4,00,000. Simply receiving an order does not count as revenue until the goods are delivered.
In these examples, revenue is realised upon the delivery of goods to customers.
The realisation concept stipulates that revenue is recognised when goods or services are actually delivered.
To summarise, realisation occurs when goods or services are sold either for cash or on credit, leading to the inflow of assets in the form of receivables.
The significance of the Realisation Concept includes:
This concept helps make accounting information more objective.
It ensures that transactions are recorded only when goods are delivered to the buyer, ensuring accurate revenue recognition.
Read the next article to learn more about the Accrual Concept.