Revenue Recognition

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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.

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RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. When should a company recognize revenues on its books?

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