May 2022
This month top tutor Tom Clendon answers your query around revenue and double entry.
Question
Regarding IFRS 15 Revenue from Contracts with Customers, I don’t get the debits (Dr) and credits (Cr). Please explain!
Tom’s answer
When revenue (sales or turnover) is recognised then that is the Cr entry. Where the Dr is posted depends on the timing of the receipt of cash. It should be noted that the timing of the recognition of revenue is not connected to when cash is actually received; rather revenue is recognised when the seller has fulfilled its contractual obligation by passing control. This is normally AT a point in time (e.g. when goods are being sold) but can be OVER time (e.g. when a service is being provided).
The three potential Dr entries are!
1: Cash
Where the receipt of cash happens to coincide with revenue being recognised, e.g. a supermarket selling food to a customer, then the Dr is to cash.
Dr Cash XX
Cr Revenue XX
2: Receivables
Where the receipt of cash is due to happen after the revenue has been recognised, e.g. a business-to-business transaction on credit terms, then the Dr is to receivables to reflect the monies owed.
Dr Receivables XX
Cr Revenue XX
3: Creditors
When the cash is received in advance of the sale, then at that point a liability is recognised (Dr Cash, Cr Liability). This liability can be referred to as deferred income and represents the obligation to perform the contract.
An example of this is airlines who collect the cash from ticket sales in advance of the flight. When it comes to recognising revenue (when the flight has been completed), the Dr is to creditors, as the obligation has then been fulfilled and the liability can be extinguished.
Dr Liabilities XX
Cr Revenue XX
- A follow up question!
I am often asked by students if they should always write down journal entries to exam questions.
My answer to this is that it is really important that you write an answer that addresses the requirement. So clearly if an exam question requires the journals to be written, then that is what must be done.
However, where a question is set in a situation and you are asked to discuss and explain the accounting treatment to a stakeholder, then in these situations more marks are always given for the words than any presentation of the numbers.
In any event the stakeholders are unlikely to understand the jargon of debits and credits.
In ACCA’s SBR exam, journals are never asked for. However, questions have asked for the “accounting adjustments”. Now whilst the examiner’s answer may then go onto give journal entries it also perfectly acceptable to answer such as question by writing:
Reduce Liabilities XX
Recognise Revenue XX
As it is to write the journal of
Dr Liabilities XX
Cr Revenue XX
• Tom Clendon is an ACCA SBR online lecturer and podcaster. See www.tomclendon.co.uk
His PQ magazine Back to Basics video on double entry bookkeeping can be found at https://vimeo.com/429252329