In simple words revenue recognition states that the revenue must be recorded when it is earned or realized. It can also be put as a firm must not delay till the revenue is practically acquired to record. Revenue must be accounted once the firm has earned it. This is the main concept in accounting due to the fact that revenue can be accounted without acquiring.
When are revenues realized?
It is once a firm sells the services or goods for any asset or cash. For example, if a business gives to a customer an inventory, it’s called realizable revenue. This deal leads to a particular value of cash. Once the revenue is earned, it is recorded. For the above example, once the ownership of the inventory is bore by the customer then only revenue is acquired.
Following are three key exceptions to the principle:
- Some businesses have to collect the revenue before the work even completes example defence work or construction work. In such cases, the revenue is collected several times at different stages of completion.
- Some businesses are of the nature which has to realize the revenue once the production is finished but the sale hasn’t taken place yet. Example, agricultural companies, oil, mining due to their products being marketed and sold immediately.
- This exception is when the revenue is realized only when the cash is actually received by the firm. This concept is called cash basis accounting. Example: instalment sales.