Question

Explain the realisation principle.

Answer 1

1. According to this principle, revenue is deemed to be realised when the goods have been transferred or the services have been rendered to a customer. In the realisation of revenue, the receipt of cash is not significant. If a firm sells goods in April and receives cash in June, revenue will be considered as realised in April when the goods were sold.
2. Similarly, expenses are recognised not when the cash is paid but when the assets or services are used to produce revenue. For example, rent for January 1, 2001, to March 31, 2001, though unpaid, will be recognised during the accounting year 2000-2001. Likewise, cost of goods lost by fire is immediately recognised in the year of loss.