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CA Intermediate · Advanced Accounting · AS 9 Revenue Recognition

Sundaram Ltd sold goods on 10 January 2025 for Rs 8,00,000 and recognised the revenue. On 20 February 2025, the customer, Rao Enterprises, became insolvent and Rs 3,00,000 of the amount is now considered doubtful of recovery. Which treatment is correct as per AS 9?

The doubtful Rs 3,00,000 should be charged as a separate expense, such as bad debts or a provision, rather than reducing revenue. AS 9 says that when collectability of an already recognised amount becomes uncertain, the amount is treated as an expense and not as an adjustment to originally recognised revenue.

  1. AReduce the revenue for the year by Rs 3,00,000
  2. BRecognise the Rs 3,00,000 as a separate provision/bad debt expense, not an adjustment to revenueCorrect
  3. CReverse the entire sale of Rs 8,00,000
  4. DIgnore it until actual non-recovery occurs in the next year

Explanation

Under AS 9, when uncertainty arises about collectability of an amount already recognised as revenue, the uncollectible amount is recognised as an expense (bad debt or provision), not as an adjustment of the revenue originally recognised. So Rs 3,00,000 is charged as an expense, and revenue stays at Rs 8,00,000.

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