Discuss the realization concept, giving examples of how it has influenced the accounting standards
The realization concept means that accounts recognize transactions. They do not just recognize the transactions when cash exchanges hands, but also when the transaction occurs at the point of sale and this is when the transaction becomes legal, as it does not just become legal when the money is fransferred (“What Is Realization Concept In Accounting”, n.d.). For example, assume I bought a house, which did not belong to me only after I paid money for it. In this case, contract was necessary. After I had the formal contract with the original owner of this house, then I owned the house legally. The contract signed is the point of sale that has been realizated. When we are going to buy goods from a supermarket, but have not, then there has been no realization. However if we purchase the goods, the money has been realized by the cashier, and we get a receipt from the cashier.
Realization concept in Accounting is formulated to solve the problem of revenue recognition. This concept states that the revenue should be recognized only when it has been realized. The essential meaning of Realization is that revenue or the liability should not be recognized in the books of accounts unless a change in the asset or liability has become sufficiently definite and objective for recognition in the books of account, which means profits cannot be calculated on goods that have been manufactured but not yet sold (“Realization Concept Assignment Help”, n.d.). Let’s back to the house purchasing example, when I told the owner of the house that I would like to but the house, the owner could not calculate the profit yet, because the transaction had not been realizated yet. However, once the agreement between us had been made and a contract had been signed, the profit on this house was allowed to be calculated.
Reference
What Is Realization Concept In Accounting? (n.d.). Retrieved Aug 5, 2012, from http://www.blurtit.com/q3388528.html Realization Concept Assignment Help. (n.d.). Retrieved Aug 5, 2012, from http://www.transtutors.com/accounting-homework/concepts-and-conventions/realization-concept.aspx Briefly define and explain the purpose of the balance sheet, income statement and statement of changes in equity. In your answer you should include the linkages between each
The Income statement, which shows how profitable the firm is, communicates the inflows and outflows of assets, where inflows are the revenues generated and outflows are the expenses. It is a sumary of the sources of revenues and expenses that result in a profit or a loss for a specified accounting period (“THE INCOME STATEMENT AND BALANCE SHEET”, n.d.).
The Balance sheet shows a snapshot of organization’s assets, liabilities and equity at one point in time and it demonstrates the accounting equation. The purpose of a balance sheet is to report the financial position of a company at a certain time, and to identify potential liquidity problems ((“THE INCOME STATEMENT AND BALANCE SHEET”, n.d.).
A statement of changes in