An
accounting principle under generally accepted accounting principles
(GAAP) that determines the specific conditions under which income
becomes realized as revenue. Generally, revenue is recognized only when a
specific critical event has occurred and the amount of revenue is
measurable. According to this concept, revenue must be recognized when:
- They are realized or realizable and
- They are earned
Revenue
is realized when products are exchanged for cash or claims to cash (Receivable). Revenue is realizable when
related assets received are readily convertible to cash or claims to cash. Revenue
is earned when the products are delivered or services are performed. Recognizing
the revenue means recording the amount as revenue in the financial statements.
In
Cash Basis Accounting, revenue is recognized when cash is received no matter when
goods or services are sold. For revenue to be recognized, both the above conditions
must be met. In other words for revenue to be recognized, final delivery must
be completed (of goods or services)
and there has to be a payment assurance.
Let
us have a look at the timing of Revenue Recognition:
- For sale of finished goods (Inventory Items), revenue is recognized at the date of sale (some interpret this as the date of shipping or the date of delivery)
- For sale of services (e.g. support services), revenue is recognized when the services are performed (delivered)
- For sale of Asset Items (other than inventory items like finished goods), revenue is recognized at the point of sale (i.e. when the customer is invoiced)
- For revenue from other activities like rent for using company’s Fixed Assets, revenue is recognized as time passes or as assets are used.
Revenue Recognition Accounting
If
revenue is not recognized immediately, what is the accounting entry for the
Sales Invoice? You credit, what is called as Deferred Revenue (or Unearned
Revenue). Deferred Revenue is actually a liability for the company. As and when
the goods or services are delivered, the Deferred Revenue is reduced (debited)
and revenue is recognized.
To
that effect, Deferred Revenue will be reduced and revenue will be recognized End
of Month, another months revenue is recognized. >>>
Summary by : Oni Zamroni
Summary by : Oni Zamroni
