What Is the Revenue Recognition Principle?

The recognition of income refers to the time when income is recorded. The recognition of income should solve two problems: one is timing; the other is measurement. Timing refers to when the income is recorded in the book, such as whether the sales of goods (or long-term engineering) are recognized before, during, or after the sale; the measurement refers to the amount of registration, whether the total method or the net amount Method, the labor service income is based on the percentage of completion method or the contract of completion method.

Recognition of income

The recognition of income mainly includes the recognition of product sales income and labor service income. In addition, it also includes

In addition to the recognition of income, it must meet the definitions, quantifiability,

Revenue recognition

Accounting confirmation refers to the objective identification of economic events that occur in accounting entities according to certain standards, and includes them in accounting elements such as assets, liabilities, owner's equity, income, expenses, and profits, and formally records them in the books Into the accounting statements. In the entire accounting process, confirm whether the item should be included in the first pass of a certain element of the financial statements. The confirmation requires that both a text and a number are used to describe a project. The amount must be included in the general record of the financial statements. . Confirm that a project and related information should meet four basic criteria, namely, definition, measurability, relevance and reliability. Recognition is important because it represents the identification and judgment in the accounting behavior, that is, the decision-making stage. Only when it is properly confirmed, can it be properly recorded and reported, and it can produce useful information for the users of accounting information. Whether or not revenue is recognized, when, and how much is recognized is a major problem in financial accounting, and it is also a common method used by some companies to "whitewash statements" and financial fraud, because the recognition and measurement of income involves the calculation of corporate profits and losses. Influence the decisions of various interest groups.

Revenue recognition principles

1.1 Revenue recognition basis-accrual basis

After the formation of modern enterprises, due to the separation of ownership and management rights, fiduciary responsibility has become a common concern of owners and operators, and has gradually become the goal of financial accounting. The accrual system is derived from this economic environment.

From the point of view of double-entry bookkeeping, the recognition of an income also recognizes the increase of an asset or the decrease of a liability; the recognition of an expense also recognizes the decrease of an asset or the increase of a liability. Accrual basis involves the confirmation of all accounting elements. But income is one of the most complicated elements of accounting. The recognition of income, especially when it is recognized, may be one of the most complicated issues in financial accounting. The recognition of income is that the right to collect income has occurred, and the recognition of related expenses is that the responsibility to pay the expenses has been determined. Therefore, the accrual system is mainly for the recognition of income and expenses.

1.2 Principles of Revenue RecognitionEssentiality over form

In the Accounting Standards for Business EnterprisesRevenue (hereinafter referred to as the Revenue Standards), the recognition and measurement of income from the three major types of transactions or events in the sale of goods, provision of labor services, and use of the company's assets by others are specified. Non-monetary transactions, leasing, insurance companies' insurance contracts, futures, investments, debt restructuring and other special transactions and matters, their recognition principles are separately specified in their specific guidelines. Judging from the contents of various confirmations, it embodies the principle of substance over form in comparison with the previous, that is, the conditions for revenue recognition are not the delivery of ownership certificates or physical form, but the substantiality of the main risks and rewards of the ownership of the goods. condition.

1.3 How to recognize income

In the Revenue Standards, the definition of income is "the total inflow of economic benefits formed in the daily activities of selling goods, providing services, and using other company's assets. It does not include payments collected for third parties or customers. ". From this definition, it can be decomposed into three important characteristics of income. First, it is the economic benefits formed by daily activities. Second, this inflow of benefits is based on the sale of goods, the provision of labor services, and the use of assets of the company by others. Third, the inflow of economic benefits does not include the money collected. In this way, accountants can recognize revenue from these three characteristics.

The recognition of income requires the professional judgment of accountants. For each income-related transaction or event, it is necessary to identify whether the items corresponding to the income should be formally recorded in accounting, when should be recorded and included in the statement, and whether the items recorded or included in the statement are consistent Four basic criteria (definability, quantifiability, relevance, and reliability)? And should also consider: whether the income and its related costs and expenses match each other, whether the benefits are greater than the costs, whether the income items that should be recorded and included in the statement meet the materiality principle, etc.

Actual status of revenue recognition

2.1 Traps in operating income

Since income is an economic matter that results in an increase in assets or a decrease in liabilities, or both, it is a source of corporate profits. The importance of profits to a company is self-evident. System ", so in which way, when and under what conditions are determined to be the right to occur and the profit is determined. Some company financial statements have the following pitfalls in the recognition of operating income:

2.1.1 Change the sales revenue recognition method. Some companies do not sell a single product, but sell the entire system, which requires implementation, installation and service. The sales process lasts a long time, so the revenue is not realized at one time. Especially for sales realized across years, the profit needs to be distributed between years. General enterprises divide the income realization ratio according to the different stages of sales, and changes in this type of ratio will undoubtedly affect the current profit.

2.1.2 Fictional income. This is the most serious financial fraud. There are several methods: one is to remove the white bar from the warehouse for sales accounting; the other is to invoice the invoices to confirm the revenue; the third is to false invoices to confirm the revenue. For example, if a listed company uses a subsidiary to sell to a third party at a market price, confirm the subsidiary's sales revenue, and then buy it back from another third party, this approach avoids the constraint that the group's internal transactions must offset, ensuring that Revenue and profit were recognized in the consolidated statement, which achieved the purpose of operating income.

2.1.3 Revenue is recognized in advance. This situation includes: one is to determine some uncertain income as income; the second is the inappropriate use of the percentage of completion method; the third is the mismatch between income and expenses; the fourth is to issue invoices in advance to beautify performance. The method of confirming the income in advance is mainly those enterprises with lower current income and higher expenses, especially in the real estate and high-tech industries.

2.1.4 Deferred recognition of revenue. Deferred revenue recognition is the deferral of revenue that should be recognized in the current period to future periods. As with revenue recognition in advance, deferred revenue recognition is a method of corporate earnings management. This approach is generally used when the company's current earnings are relatively abundant, and future earnings are expected to decrease.

2.2 Diversity and Complexity of Confirmation

In accounting standards, the basic standards and main principles for recognition are only related to the sale of goods, which can only be summarized as:

Meet the definition of income; expected economic benefits flow into the enterprise; and can be reliably measured.

The income has been realized or achievable (get the right to receive cash) and has been earned (complete the whole process of income earning).

The ownership and risks related to the sale of goods have actually been transferred; or they are better than forms.

Obviously, after a transaction or event occurs, if it is only related to the sales revenue of goods, whether and when it should be recognized as revenue requires accountants to use professional knowledge and practical work experience, that is, professional judgment, from the type of transaction, income After determining the type of the product and whether there are additional conditions at the time of sale, it is necessary to analyze and judge the ownership and risks associated with the product after the apparent phenomenon that the money and the goods are clear. Whether income should be recognized and when, and what records should be made and how to properly include them in the financial statements. Therefore, it can be said that whether or not to recognize the sales revenue of goods and when to recognize this revenue seems to be common accounting knowledge. In fact, it is a very complicated and difficult question to answer.

2.3 Gaming of Accounting Standards among Nations

From the perspective of the revenue recognition environmentthe entire accounting standards and even the accounting standards system, there are still different degrees of differences between China s accounting standards and other countries accounting standards and international accounting standards. Some of these differences are due to various countries. Different socio-economic characteristics are determined by different cultural and legal traditions of each country, and some are caused by technical defects in the countries or international accounting standards themselves. With the listing of foreign companies on the Chinese capital market, the choice of accounting standards will inevitably be faced. If an overseas company is listed on the Chinese capital market and it still compiles its accounting statements in accordance with overseas standards, this is obviously not tolerated by Chinese law. For countries where the standard is superior to Chinese accounting standards, it may not be acceptable. From the above two aspects, this difference is a challenge to the procedures and methods for revenue recognition in our standards.

Revenue recognition solution

3.1 Continuously improving the basic procedures for revenue recognition

In the "Accounting Standards --- Revenue" guide, the recognition of revenues must be based on comparative principles, focusing on the economic substance of transactions. The following four conditions are required to recognize revenue:

The enterprise has transferred the risks and rewards of ownership of the goods to the buyer;

The company neither retains the right to continue management usually associated with ownership, nor implements control over the goods sold;

The economic benefits related to the transaction can flow into the enterprise reasonably; The related income and costs can be reliably measured.

In this way, companies are required to analyze the nature of transactions in accordance with the characteristics of different transactions, and correctly judge whether the main risks and rewards of ownership in each transaction have actually been transferred, whether to retain the right to continue management of ownership, and whether they still have control over the goods sold. The implementation of controls, whether the relevant economic benefits can flow into the enterprise, and whether the revenue and related costs can be reliably measured. Only if these conditions are met at the same time can revenue be recognized, otherwise it cannot be confirmed even if the goods have been issued or the price has been received. income.

How to avoid the "digital game" that whitewashes profits from the aspects of confirmation and measurement has always been an auditing problem. For the confirmation of income: the first is to find evidence of the existence of transactions to prevent fake sales; the second is to make profits The process of obtaining is concrete; the third indicates that the measurement of income is reliable; the fourth requires that it is achievable and has the ability to collect cash. In addition, auditors should pay special attention to the risk of fraud related to revenue recognition and use effective analytical procedures during the planning phase to identify abnormal and unexpected relationships involving revenue and related accounts.

3.2 Strive to improve the professional judgment of accountants

Although accounting confirmation and measurement are important, because the accounting decisions they represent are a kind of in-depth, little-known hidden accounting activities, they often go unnoticed, especially for confirmation. In the face of increasingly complex and diversified transactions and events, confirmation and measurement have placed higher requirements on accountants, that is, in accounting treatment, they should think in accordance with regulations and make decisions based on experience and their own business level. We can call them accounting decisions.

At present, the biggest problem for accountants is that they have long been accustomed to relying on ready-made accounting systems for accounting treatment, and lack independent judgment ability. While formulating and implementing accounting standards, strengthening professional knowledge training, reforming and improving the assessment, evaluation, and supervision systems, and improving the quality of China's accounting personnel, is a very important task, and it is also indispensable in the construction of China's accounting standards system. important parts of. Of course, we should clearly realize that improving the quality of accounting personnel is a gradual process and cannot be achieved overnight. At the same time, accountants should also actively change their own concepts. They must keep in mind their important position and major responsibilities in the development of the market economy, carefully study and master the new content of accounting standards, and ensure that the accounting information truly and fairly reflects the financial status and operating results of the company. Consciously resist and prevent risks.

3.3 Seeking the maximum benefits of the internationalization of China's accounting standards

As a big country, China will further improve and perfect its accounting standards after joining the WTO, and create conditions for the internationalization of accounting standards in terms of socioeconomic environment. Facing the established international accounting standards, we must recognize the reality, be good at finding balance from imbalances, and take full account of our national conditions, and take effective measures to do the following: Improve our accounting standards The quality of the formulation, speeding up the connection with international accounting standards (mainly British and American accounting standards), and working out a conceptual framework that is not only conducive to protecting China's interests, but also promoting the internationalization of accounting, and has been recognized by the international community. Change the thinking of traditional accounting standards, change the traditional concept of doing nothing as long as there are no laws and regulations, and avoid the disadvantages of Chinese and foreign companies applying different laws and regulations in China. status. consciously train international accounting talents and international accounting scholars, and actively strive for or create conditions to participate in international accounting affairs. Based on this, we promote accounting education and strengthen accounting research. Establish an environmental adaptation mechanism for the internationalization of accounting standards as soon as possible. Although the internationalization of accounting standards may result in unprofitable situations, the internationalization of accounting standards is the general trend and trend. As long as we grasp the scale, advantages, disadvantages and rhythm, we can smoothly and effectively implement the internationalization of China's accounting standards.

The recognition of income is a major problem in financial accounting. Whether the revenue can be recognized and when it is confirmed depends mainly on the professional judgment of the accounting staff. The formulation of the new accounting standards has solved the difficulty of revenue recognition to a certain extent, but how to better Carrying out the spirit of the new standard is a new problem facing accounting personnel. It must also be solved by continuously improving the procedures for revenue recognition and improving the professional quality of accounting personnel.