we recognise sales revenue when goods or services have been supplied and a sales invoice issued

Sales revenue

Sales revenue is not realised when a customer places an order, as at that stage it is too early to say whether an eventual sale will be made. 

We should not wait until the cash is received from a customer before recognising that a sale has been made.

Asset/Receivable

The other side of the realisation concept is to ask at what stage an asset, in this case a receivable, should be recognised. 

Thus we recognise a receivable when an invoice is raised

We do not recognise a receivable when an order is placed as it is too early to say that we have an 'asset'. 

If we only recognised revenue when cash was received, the statements of financial positions would not have receivables

When should goods sold on a 'sale-or-return' basis be recognised?

The goods are not strictly 'sold' until they have been accepted by the buyer or the deadline for return has passed. 

If the full sales value of the goods has been included with sales and receivables (and the full cost taken out of inventories), the amounts that could still be returned should be taken out of sales/receivables and added back into inventories. 

The profit is then automatically included in the period in which it was actually earned.

The dual aspect convention

This convention is the basis of double-entry bookkeeping. 

It means that every transaction entered into has a double effect on the position of the entity as recorded in the ledger accounts at the time of that transaction.

The money measurement convention

This limits the recognition of accounting events to those that can be expressed in money terms. 

This convention thus excludes the recording of many other economic factors that are being debated under the title of social responsibility accounting. 

For example, no value is attributed to key employees within the organisation.

The Periodicity Convention

This convention assumes that transactions can be identified within a particular period.

The Objectivity Convention

This convention states that the financial statements should not be influenced by the personal bias of the person preparing them.

The Prudence Convention

This convention states that assets and income should not be overstated and liabilities and expenses should not be understated.

The Consistency Convention

This convention states that the same accounting principles should be used to prepare financial statements over a number of periods.

The Materiality Convention

This convention states that items with a relatively small monetary value are not significant unless they change a profit into a loss, therefore small amounts at the year end can simply be charged to office expenses etc.

The Stable Monetary Unit Convention

This convention assumes that the monetary value of a currency is stable from one period to the next.

Fair Presentation

This assumes that an organisation’s financial statements do not contain any significant errors that would affect the actions of the users.

It also enables the users to financial statements to gain a picture of the affairs of the organisation that is sufficient to make proper judgements.