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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Gupta & Sons sold goods for Rs 3,00,000 on credit on 28 March, and delivery was completed that day. The customer will pay in May. The books close on 31 March. Under the accrual basis and the revenue recognition principle, how should the sale be treated for the year ending 31 March?

The sale is recorded as revenue of Rs 3,00,000 in the year ending 31 March. Under the accrual basis, revenue is recognised when goods are delivered and the right to payment arises, not when cash arrives. The unpaid amount appears as a debtor.

  1. ANot recorded until the cash is received in May
  2. BRecorded as revenue of Rs 3,00,000 for the year ending 31 MarchCorrect
  3. CRecorded as revenue only to the extent of 50% of the amount
  4. DRecorded as a liability of Rs 3,00,000

Explanation

Under accrual accounting, revenue is recognised when goods are delivered and the right to receive payment arises, not when cash is received. Delivery was on 28 March, so the whole Rs 3,00,000 is revenue of the year and a debtor is created. Waiting for the cash in May would apply the cash basis, which is wrong.

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