Revenue Recognition

AAA

DEFINITION of 'Revenue Recognition'

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.

INVESTOPEDIA EXPLAINS 'Revenue Recognition'

For most businesses, income is recognized as revenue whenever the company delivers or performs its product or service and receives payment for it. However, there are several situations in which exceptions may apply. For example, if a company's business has a very high rate of product returns, revenue should only be recognized after the return period expires.

Companies can sometimes play around with revenue recognition to make their financial figures look better. For example, if XYZ Corp. wants to hide the fact that it is having a bad year in sales, it may choose to recognize income that has not yet been collected as revenue in order to boost its sales revenue for the year.

VIDEO

Loading the player...
RELATED TERMS
  1. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  2. Income

    Money that an individual or business receives in exchange for ...
  3. Accrued Revenue

    An asset class for goods or services that have been sold or completed ...
  4. Completed Contract Method - CCM

    An accounting method that enables a taxpayer or business to postpone ...
  5. Accrual Accounting

    An accounting method that measures the performance and position ...
  6. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
RELATED FAQS
  1. What does it mean when airline revenues are adjusted for air traffic liability?

    Airline revenue adjustments for air traffic liability are simply part of the accrual accounting method that airlines commonly ... Read Full Answer >>
  2. How is deferred revenue treated under accrual accounting?

    In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds ... Read Full Answer >>
  3. What is the difference between deferred revenue and accrued expense?

    Deferred revenue is the portion of a company's revenue that has not been earned, but cash has been collected from customers ... Read Full Answer >>
  4. Why is deferred revenue listed as a liability on the balance sheet?

    Deferred revenue, which is also referred to as unearned revenue, is listed as a liability on the balance sheet, because under ... Read Full Answer >>
  5. What are the difference between gross revenue reporting and net revenue reporting?

    Recognizing and reporting revenue are critical and complex problems for accountants. There are many gray areas in both recognition ... Read Full Answer >>
  6. When do you use installment sales method vs. the cost recovery method?

    There are four primary methods that accountants use to recognize business sales revenue: percentage of completion, completed ... Read Full Answer >>
  7. What is the difference between IAS and GAAP?

    To answer this question, we must first define what IAS and GAAP are, in order to get a better grasp of the function they ... Read Full Answer >>
  8. When should a company recognize revenues on its books?

    When a company makes revenues from its operations, it must be recorded in the general ledger and then reported on the income ... Read Full Answer >>
Related Articles
  1. Economics

    Understanding Revenue Recognition

    Revenue recognition is an accounting term describing how and when a company records revenue in its accounting records.
  2. Fundamental Analysis

    Detecting Accounting Manipulation

    "One-time charges" and "investment gains" are two strategies companies can use to distort their numbers.
  3. Economics

    Understanding the Top Line

    Top line refers to a company’s gross sales without any reductions for discounts or returns.
  4. Economics

    What's an Allowance for Doubtful Accounts?

    The allowance for doubtful accounts represents the percentage of the accounts receivable the company expects to write-off as uncollectible.
  5. Fundamental Analysis

    Understanding Activity Ratios

    Activity ratios measure how effectively a business uses its assets.
  6. Investing Basics

    What is Accrued Income?

    In a mutual fund, accrued income is earnings that have accumulated over the year, but have not yet been paid out to shareholders.
  7. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.
  8. Professionals

    What Does an Auditor Do?

    An auditor ensures that organizations maintain accurate and honest financial records.
  9. Fundamental Analysis

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  10. Economics

    How Does an Operating Lease Work?

    Operating lease is a term used mostly in accounting to denote a lease that gives the lessee rights to use and operate an asset without ownership.

You May Also Like

Hot Definitions
  1. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  2. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  3. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  4. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  5. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  6. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!