Contract, Customer, Income, Revenue, Contract Asset18/11/2023 0 By indiafreenotes
A contract is an agreement between two or more parties that creates enforceable rights and obligations. Contracts can be written, oral, or implied by customary business practices.
The identification of a contract is a fundamental step in applying revenue recognition principles. The standard requires that the parties have approved the contract, the entity can identify each party’s rights regarding the goods or services to be transferred, the entity can identify payment terms, and it is probable that the entity will collect the consideration to which it is entitled.
A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Identifying the customer is important in determining when and how to recognize revenue. The principles in Ind AS 115 apply specifically to contracts with customers, and understanding who the customer is helps in defining the scope of the standard.
Income refers to increases in economic benefits during an accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
While “income” is a broader term encompassing various inflows and outflows, revenue specifically pertains to income arising from the core operating activities of an entity, particularly the sale of goods and services.
Revenue is the gross inflow of economic benefits during the period arising in the course of ordinary activities when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Revenue represents the amount of money generated by an entity from its primary operating activities, such as the sale of goods, rendering of services, or other activities that constitute the entity’s ongoing major or central operations.
A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time (e.g., the entity’s performance to date).
Contract assets arise when an entity transfers goods or services to a customer, and the entity has a right to consideration that is not yet unconditional. These assets typically result from performance obligations satisfied over time, and their recognition is subject to certain conditions being met.