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What is the difference between realisation n conservatism concept


Reetikaa  R

Reetikaa R

CA Foundation

4K+

09-Mar-21 19:54

19

Answers (4)

Best Answer

PLEASE GO THROUGH THIS. YOU WOULD SURLEY UNDERSTAND Realization or Recognition Concept: The realization or recognition concept indicates the amount of revenue that should be recognized from a given sale. Realization rules help the accountant in determining that a revenue or expense has occurred, so that it can be measured, recorded, and reported in financial reports. Realization refers to inflows of cash or claims to cash (e.g., accounts, receivable) arising from the sale of goods or services. Thus, if a customer buys Rs. 500 worth of items at a grocery store, paying cash, the store realizes Rs. 500 from the sale. If a clothing store sells a suit for Rs. 3,000, the purchaser agreeing to pay within 30 days, the store realizes Rs. 3,000 (in receivables) from the sale, provided that the purchaser has a good credit record so that payment is reasonably certain (conservatism concept). The realization concept states that the amount recognized as revenue is the amount that is reasonably certain to be realizedâ??that is, that customers are reasonably certain to pay. Of course, there is room for differences in judgment as to how certain â??reasonably certainâ?? are. However, the concept does clearly allow for the amount of revenue recognized to be less than the selling price of the goods and services sold. The obvious situation is the sale of merchandise at a discountâ??at an amount less than its normal selling price. In such cases, revenue is recorded at the lower amount, not the normal price. Conservatism principle - What is the conservatism principle? The idea of conservatism suggests that you, as a business, should anticipate and record future losses rather than future gains. The principle of conservatism in accounting gives guidance when recording cases of uncertainty or estimates. In other words, you should always lean towards the most conservative side of any transaction. The conservatism principle is one of the main accounting principles and guidelines listed under UK GAAP. GAAP is a regulatory body of principles and standards that all accountants should follow when reporting the financial activity of a business. Hence, for stakeholders interested in the financial data of a company, the conservatism principle ensures that the financial statements and information of that business is not overestimated or misleading. The conservatism principle explained: In situations where uncertainty exists and there is doubt between two reasonable alternatives for recording an item, according to the conservatism principle your accountant should always choose the â??less favourableâ?? outcome. This could mean minimising profits by recording estimated expenses or losses, and not recording the estimated gains or revenues. If there is uncertainty about a loss or potential loss - then you should record it. If there is uncertainty about a gain or potential gain - then you should not record it. And of course, if there is certainty about a gain - then you should record it.


Sai Teja

Sai Teja

CA Foundation

12K+

09-Mar-21 20:56

Please go through video / notes and also the study material. Just asking a question on what is the difference does not suffice. You have to elaborate specific point where you are confused. That is when we or other students can help you


Sriram Somayajula

Sriram Somayajula

Admin

09-Mar-21 20:14

PLEASE GO THROUGH THIS. YOU WOULD SURLEY UNDERSTAND Realization or Recognition Concept: The realization or recognition concept indicates the amount of revenue that should be recognized from a given sale. Realization rules help the accountant in determining that a revenue or expense has occurred, so that it can be measured, recorded, and reported in financial reports. Realization refers to inflows of cash or claims to cash (e.g., accounts, receivable) arising from the sale of goods or services. Thus, if a customer buys Rs. 500 worth of items at a grocery store, paying cash, the store realizes Rs. 500 from the sale. If a clothing store sells a suit for Rs. 3,000, the purchaser agreeing to pay within 30 days, the store realizes Rs. 3,000 (in receivables) from the sale, provided that the purchaser has a good credit record so that payment is reasonably certain (conservatism concept). The realization concept states that the amount recognized as revenue is the amount that is reasonably certain to be realizedâ??that is, that customers are reasonably certain to pay. Of course, there is room for differences in judgment as to how certain â??reasonably certainâ?? are. However, the concept does clearly allow for the amount of revenue recognized to be less than the selling price of the goods and services sold. The obvious situation is the sale of merchandise at a discountâ??at an amount less than its normal selling price. In such cases, revenue is recorded at the lower amount, not the normal price. Conservatism principle - What is the conservatism principle? The idea of conservatism suggests that you, as a business, should anticipate and record future losses rather than future gains. The principle of conservatism in accounting gives guidance when recording cases of uncertainty or estimates. In other words, you should always lean towards the most conservative side of any transaction. The conservatism principle is one of the main accounting principles and guidelines listed under UK GAAP. GAAP is a regulatory body of principles and standards that all accountants should follow when reporting the financial activity of a business. Hence, for stakeholders interested in the financial data of a company, the conservatism principle ensures that the financial statements and information of that business is not overestimated or misleading. The conservatism principle explained: In situations where uncertainty exists and there is doubt between two reasonable alternatives for recording an item, according to the conservatism principle your accountant should always choose the â??less favourableâ?? outcome. This could mean minimising profits by recording estimated expenses or losses, and not recording the estimated gains or revenues. If there is uncertainty about a loss or potential loss - then you should record it. If there is uncertainty about a gain or potential gain - then you should not record it. And of course, if there is certainty about a gain - then you should record it.

Thank u


Reetikaa  R

Reetikaa R

CA Foundation

4K+

09-Mar-21 20:58

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