Cambridge Syllabus Notes

7.1 Accounting Principles – Realisation 📚

What is the Realisation Principle?

The realisation principle says that a company can record revenue only when it has earned it, not when it receives the money. Think of it like a pizza delivery: you deliver the pizza (you’ve earned the sale) even if the customer pays later.

When to Recognise Revenue?

When the goods are delivered or the service is performed.
When the risks and rewards of ownership have passed to the customer.
When the amount of revenue can be measured reliably.

Realisation in Practice – Examples 💡

Scenario	Revenue Recognised?	Why?
Sold a laptop on credit for £800.	Yes	Goods delivered, risks transferred.
Received £500 in advance for a future software subscription.	No	Revenue earned only when service is provided.
Completed a building project and invoiced £10,000.	Yes	Work finished, revenue earned.

Exam Tips for Realisation 🔍

Look for key words: earned, delivered, completed, performed, invoiced.
Check the timing: Revenue is recognised when the transaction is complete, not when cash arrives.
Remember: If the customer pays before the service is done, you still wait until the service is performed to record revenue.
Practice: Work through past papers and identify when revenue should be recorded.

Quick Formula for Revenue Recognition

$Revenue = \text{Amount invoiced} \times \text{Percentage of work completed}$ (if the work is done in stages).

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