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On what basis a contractor earns the revenue in ordinary course of his business?
- a)Cash basis
- b)Sales basis
- c)Production basis
- d)Payments basis
Correct answer is option 'C'. Can you explain this answer?
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On what basis a contractor earns the revenue in ordinary course of his...
Understanding Contractor Revenue Recognition
In the context of a contractor's business, revenue is primarily earned based on the completion and delivery of the contracted work, which is best characterized by the production basis. Here’s a breakdown of why this is the correct answer:
1. Definition of Production Basis
- The production basis refers to recognizing revenue when the work is completed or when significant milestones in the project are achieved.
- This accounting method aligns revenue with the actual progress of the project, ensuring that income is recognized in accordance with the work performed.
2. Comparison with Other Methods
- Cash Basis: Revenue is recognized only when cash is received. This may not accurately reflect the contractor's performance or the value of work completed.
- Sales Basis: This method typically applies to retail and may not accurately reflect the complexity of contract work and the longer timelines involved.
- Payments Basis: Revenue recognition based on payments made by clients does not ensure that the work has been completed or that the services have been rendered satisfactorily.
3. Importance of Accurate Revenue Recognition
- Properly recognizing revenue on a production basis helps in reflecting the true financial position of the contractor's business.
- It allows for better financial forecasting and project management by aligning expenses and revenues with the actual work done.
4. Compliance with Accounting Standards
- Many accounting frameworks, including IFRS and GAAP, support the production basis for contractors, particularly in construction and long-term projects.
- This ensures that revenue is recognized in a way that is consistent and comparable across different firms.
In conclusion, the production basis is essential for contractors to accurately report their earnings in line with the actual work completed.
In the context of a contractor's business, revenue is primarily earned based on the completion and delivery of the contracted work, which is best characterized by the production basis. Here’s a breakdown of why this is the correct answer:
1. Definition of Production Basis
- The production basis refers to recognizing revenue when the work is completed or when significant milestones in the project are achieved.
- This accounting method aligns revenue with the actual progress of the project, ensuring that income is recognized in accordance with the work performed.
2. Comparison with Other Methods
- Cash Basis: Revenue is recognized only when cash is received. This may not accurately reflect the contractor's performance or the value of work completed.
- Sales Basis: This method typically applies to retail and may not accurately reflect the complexity of contract work and the longer timelines involved.
- Payments Basis: Revenue recognition based on payments made by clients does not ensure that the work has been completed or that the services have been rendered satisfactorily.
3. Importance of Accurate Revenue Recognition
- Properly recognizing revenue on a production basis helps in reflecting the true financial position of the contractor's business.
- It allows for better financial forecasting and project management by aligning expenses and revenues with the actual work done.
4. Compliance with Accounting Standards
- Many accounting frameworks, including IFRS and GAAP, support the production basis for contractors, particularly in construction and long-term projects.
- This ensures that revenue is recognized in a way that is consistent and comparable across different firms.
In conclusion, the production basis is essential for contractors to accurately report their earnings in line with the actual work completed.
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On what basis a contractor earns the revenue in ordinary course of his business?a) Cash basis b) Sales basis c) Production basis d) Payments basis Correct answer is option 'C'. Can you explain this answer?
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On what basis a contractor earns the revenue in ordinary course of his business?a) Cash basis b) Sales basis c) Production basis d) Payments basis Correct answer is option 'C'. Can you explain this answer? for CA Foundation 2025 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about On what basis a contractor earns the revenue in ordinary course of his business?a) Cash basis b) Sales basis c) Production basis d) Payments basis Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for CA Foundation 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for On what basis a contractor earns the revenue in ordinary course of his business?a) Cash basis b) Sales basis c) Production basis d) Payments basis Correct answer is option 'C'. Can you explain this answer?.
On what basis a contractor earns the revenue in ordinary course of his business?a) Cash basis b) Sales basis c) Production basis d) Payments basis Correct answer is option 'C'. Can you explain this answer? for CA Foundation 2025 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about On what basis a contractor earns the revenue in ordinary course of his business?a) Cash basis b) Sales basis c) Production basis d) Payments basis Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for CA Foundation 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for On what basis a contractor earns the revenue in ordinary course of his business?a) Cash basis b) Sales basis c) Production basis d) Payments basis Correct answer is option 'C'. Can you explain this answer?.
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