Revenue Recognition

Question 1

What is the realisation concept?

Answer 1

The realisation concept states that profit is only realised when control of goods passes to the buyer

Question 2

What three criteria must be met to be included as sales revenue?

Answer 2

1. Revenue from transaction can be easily measured
2. Economic benefits will be received
3. Ownership and control has passed to the buyer

Question 3

What is capital expenditure?

Answer 3

1. Tends to be for one-off or irregular purchases
2. Benefits should last for more than 12 months
3. Result is a non-current asset on the Statement of Financial Position
4. Can also be for improvements to existing assets

Question 4

What is revenue expenditure

Answer 4

1. Tends to be for more frequent purchases
2. Benefits should last for 12 months or less
3. Result is an expense charged against profit
4. Can also be for non-cash items such as depreciation

Question 5

Why is it important to distinguish between capital and revenue expenditure?

Answer 5

Only revenue expenditure goes on the Income Statement, capital expenditure ends up on the Statement of Financial Position

Question 6

What is amortisation?

Answer 6

Amortisation is depreciation on intangible assets, such as leases