Monday, 4 July 2016

When you should recognise revenue in business

Image courtesy of Stuart Miles at

Hello readers, hope your weekend was good. Today, I will be writing about recognising revenue in business. Some individuals do recognise revenue when it has not been received. The prudency concept in accounting states that you should not overestimate your revenue. This will prevent you from spending the money you do not have. By that I mean an individual might spend this money because they are expecting that money and that money might end up not coming in.

Most products, goods especially get their revenue once they are delivered to the customer in good condition and the customer pays promptly. You can easily recognise your revenue except in situations whereby customers are allowed to pay on a later date. Do not charge interest, it is a sin. Prices should be the same whether they are paying now or later.

While a business that builds product like a car or a house takes time to build such products. As a result profit recognition can be tricky. Its best not to wait till the end of the  project before you collect your money. You should collect them in installments as the production progresses. Revenue should be recognise once you receive the money except in situations whereby you already a long time relationship with the customer and you are convinced they will pay when their installment is due.

Some will say that you should recognise profit as you progress on the project. I will say that you should collect your money first and then recognise it so that you can spend accordingly. Meaning you do not spend money because you are expecting that money. Except in situations whereby you have established a long standing relationship with the customer and you are convinced that the person will pay as at when due.

This has nothing to do with the prepartion of your financial statements, it focuses on helping you manage your finances in business.

Keep checking out my blog regularly, Cheers!

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