IFRS 15 Journal Entries STATES the ‘accrual‘ to record the Sale/Revenue involves a DEBIT to receivable account and a CREDIT to sales revenue account; If the sale is for ‘cash‘, the cash account would be debited instead.
Table of Contents
IFRS 15 Journal Entries [Scenario: Five-Step Model]
Step 1: Identify the Contract
Before any Journal Entries, it is ESSENTIAL to determine whether a contract exists with a customer.
A ‘Contract’ is an agreement between two or More parties that creates enforceable rights and obligations. Once a valid contract is IDENTIFIED, the next step involve assessing its terms and conditions.
Step 2: Identify Performance Obligation
Under IFRS 15, Companies NEED to identify the DISTINCT performance obligations within a contract. Journal Entries related to performance obligations usually occur when these obligations are satisfied.
A ‘Performance Obligation’ is a promise to transfer goods or services to the customer.
Step 3: Determine the Transaction Price
The ‘Transaction Price’ is the amount of consideration a company EXPECTS to receive in exchange for transferring goods or services to the customer. It May include fixed amounts, variable consideration, or both.
Journal Entries are MADE to record the transaction price, INCLUDING any estimates or adjustments.
Step 4: Allocate Transaction Price
The transaction price NEEDS to be ‘Allocated’ to each distinct performance obligation within the contract. This step involves ASSIGNING the revenue based on the relative standalone selling prices of the performance obligations.
Journal Entries are MADE to allocate the transaction price among the different obligations accurately.
Step 5: Revenue Recognition
‘Revenue Recognition’ takes place when a Co. SATISFIES a performance obligation by transferring a promised good or service to the customer.
Journal Entries are MADE to record revenue when it is earned and recognized, Via the Accrual Method.
IFRS 15 Journal Entries – How to Record Revenue?
1. Unconditional Right to Recognize Revenue is Established
| Debit | Credit |
|---|---|
| Receivable A/C | |
| Revenue A/C |
| Debit | Credit |
|---|---|
| COS A/C | |
| Inventory A/C |
2. Unconditional Right to Recognize Revenue is Not Established
| Debit | Credit |
|---|---|
| Contract Asset A/C | |
| Inventory A/C |
3. When Payment is Received in Advance
| Debit | Credit |
|---|---|
| Cash A/C | |
| Contract Liability A/C |
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia