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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    Deferred revenue, which is also referred to as unearned revenue, is listed as a liability on the balance sheet, because under ... Read Full Answer >>
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  4. When do you use installment sales method vs. the cost recovery method?

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  5. What is the difference between IAS and GAAP?

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  6. 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 >>
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