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CA Intermediate · Advanced Accounting · AS 9 Revenue Recognition

Anand Ltd. sold goods for ₹5,00,000 in 2023-24 and recognised revenue. In 2024-25, the customer became insolvent and only ₹1,00,000 is expected to be recovered. Under AS 9 and related guidance, how should Anand treat the uncollectable ₹4,00,000?

The ₹4,00,000 should be recognised as a separate expense (bad debt) in 2024-25. When revenue was originally recognised, collection was reasonably certain; later uncertainty is an expense and not an adjustment to the revenue recognised.

  1. ARecognise it as a separate expense (bad debt) in 2024-25, not as an adjustment to revenueCorrect
  2. BReverse ₹4,00,000 from 2023-24 revenue as a prior period item
  3. CReduce 2024-25 revenue by ₹4,00,000
  4. DIgnore it until the customer is formally liquidated

Explanation

When revenue was recognised, ultimate collection was reasonably certain. A subsequent uncertainty about collectability is provided for as a separate expense (bad debts), not as an adjustment of the originally recognised revenue. Reversing past revenue or reducing current revenue misstates the amount of revenue earned.

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