## Effect of Uncertainty on Revenue Recognition

Uncertainty about collectability is handled differently depending on when it arises:

### Case 1: Uncertainty Exists at the Time of Sale

Revenue recognition is postponed
Recognise revenue only on cash basis or when uncertainty is resolved
Do NOT record the sale until reasonable certainty of collection exists

### Case 2: Uncertainty Arises After the Sale Has Been Recognised

Do NOT reverse the revenue already booked
Instead, create a Provision for Bad Debts (or Doubtful Debts)

### Journal Entries — Case 2 Illustration:

01/04 (Date of Sale):

```

Debtors A/c Dr. XX

To Sales Revenue XX

```

15/04 (Uncertainty arises post-sale):

```

Bad Debts Expense Dr. XX

To Provision for Bad Debts XX

```

> Note: The sale is NOT reversed. Revenue stays in the books. Only a provision is created.

Worked example

### Example 1

On 01/04, goods worth ₹50,000 are sold to a customer known to be in financial distress. At the time of sale, collection is highly uncertain.

→ Revenue should NOT be booked on 01/04.

→ Revenue is recognised only when cash is received or the financial position improves.

### Example 2

On 01/04, goods worth ₹1,00,000 are sold to a customer (no collection doubts at time of sale).

On 15/04, the customer goes bankrupt.

→ The sale booked on 01/04 is NOT reversed.

→ On 15/04: Dr. Bad Debts Expense / Cr. Provision for Bad Debts ₹1,00,000.

⚠️ Common exam mistakes

Reversing revenue when doubt about collection arises after the sale — the correct treatment is to create a provision, not reverse the sale.
Booking revenue at the time of sale when uncertainty of collection already exists at that point — revenue must be deferred.
Confusing 'provision for bad debts' with 'reversal of revenue' — they have different P&L impacts and balance sheet treatments.

Bare-Act text Para 9 – Effect of Uncertainty · AS 9 – Revenue Recognition (ICAI) · click to expand

When uncertainty arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty than to adjust the amount of revenue originally recorded.

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AS 9 – Effect of Uncertainty on Revenue Recognition

Worked example

⚠️ Common exam mistakes