Revenue Recognition
BeginnerRevenue recognition is the accounting principle that decides when and how much revenue a business records, generally when it has delivered the promised goods or services to the customer.
The question of when to count a sale is not always simple. A customer might pay in advance, pay in instalments or sign a contract covering several years of service. Revenue recognition rules make sure revenue is recorded when it is earned, not just when cash arrives.
Under the main international and US standards, a business identifies the contract, the separate promises in it, the price, how the price is split among those promises and when each promise is fulfilled. Revenue is recognised as each obligation is satisfied.
For example, a software company sells a 1,200 annual subscription paid upfront in January. It has not yet earned the full amount, because it must provide the service for twelve months. It therefore recognises 100 of revenue each month, and the unearned portion is held as a liability until it is earned.
Revenue recognition matters because revenue is the starting point of the income statement. Recognising revenue too early can make a business look stronger than it is, and has been at the centre of many accounting scandals.
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