Income statement is constructed using the principles of accrual accounting. Under accrual account, the revenue is recognized when earned and expenses are recognized when incurred.

According to the revenue recognition principle, a company recognizes revenue only when it is earned once the goods are delivered or when the service is completed. So, if a retailer sells a laptop to you in June, the retailer will recognize the revenue in June itself. However, take the case of a manufacturer, who receives an order in June, delivers the goods in July, and receives the payment in August. When should he recognize the revenue? The answer is July when it delivered the goods. Bothe IASB and FASB have described when revenue can be recognized in case of sale of goods as well as rendering of services.

IASB: Revenue Recognition

IAS 18 provides guidance for recognising the following specific categories of revenue:

Sale of goods

Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied: [IAS 18.14]

• The seller has transferred to the buyer the significant risks and rewards of ownership
• The seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold
• The amount of revenue can be measured reliably
• It is probable that the economic benefits associated with the transaction will flow to the seller, and
• The costs incurred or to be incurred in respect of the transaction can be measured reliably

Rendering of services

For revenue arising from the rendering of services, provided that all of the following criteria are met, revenue should be recognised by reference to the stage of completion of the transaction at the balance sheet date (the percentage-of-completion method): [IAS 18.20]

• The amount of revenue can be measured reliably;
• It is probable that the economic benefits will flow to the seller;
• The stage of completion at the balance sheet date can be measured reliably; and
• The costs incurred, or to be incurred, in respect of the transaction can be measured reliably.