Accounting for Business: Income Recognition and Revenue Recognition

Accounting for Business
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Answer to question 1
Income Recognition
There are five financial items of the ant-virus software company namely: earning from sales of
software, from update download, interest from investing in short- term money market, discount
arising out of early settlement of liability and issuance of equity for cash. We have to find out
which of them are to be considered as income for the year by the company as per definition
cited. Income is defined as those inflows of funds which contribute to the profit generation of the
company.
Income from software sales of anti-virus is income, as it is the sales proceeds of the product the
company deals in. Sales of such anti-virus software are the products licensed under the company
to be sold.
Update download is also an income as this is a licensed service of the company to be offered to
the clients after regular intervals. It is also to be reckoned as one of the products of the company
to be offered to the clients.
Interest from investing in short-term money market is income as it increases the money value of
the company by investment. .
Discounting of liability is income as it reduces the value of liability of the company. As liability
is a balance sheet item and cannot be adjusted, this amount of discount is to be shown as other
comprehensive income, as it contributes to the profit of the company.
The amount collected from market by issuance of share is not an income, as it will be
accumulated in company capital for further use by the company in its business process and will
directly feature in the balance sheet under the head capital.
Revenue recognition
To recognise revenue as per AASB 15: Recognition of Revenue- Contract and customers,
following five-step model is to be followed:
a) If any contract exists
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b) The declared and implied conditions of the contract to deliver goods or services to any
intended customer;
c) The negotiated price to be paid by the customer;
d) Fixed system to allocate the transaction price to the goods and services;
e) The time of recognition as revenue depends on the time control transfer to the customer.
With these pre-set conditions for revenue recognition, sales of anti-virus software and update
download will be treated as revenue as per AASB 15: Revenue recognition – contract and
customers. (Australia, 2019)
Earning form interest generated from short term money market will be treated in
interest/dividend revenue as per AASB 9 –Financial Instruments. (Ridley, 2019) (AASB, 2007)
As per IAS 18 paragraph 10, rebates allowed by creditors are to be considered as revenue in
general standard of revenue. (IASPlus, 2019)
Only share issue is not considered as revenue as it adds to the capital of the company and
features in balance sheet.
Answer to Question 2
a) Loan credential of ABC and XYZ
The case study of loan availing power of two companies is compared through the derivation of
different factors and ratios. It is observed that out of the three ratios, only Loan to value ratio is
favorable for ABC, where as for all other factors, XYZ is way ahead in credential of getting loan
of $ 6,000.
Particulars ABC XYZ
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