As per Revenue Recognition Principle revenue is considered as the income earned on the date when it is realized. Unearned revenue should not be taken into account. In accounting process the revenue recognition criteria is vital for determining income pertaining to an accounting period. It avoids the possibility of inflating incomes and profits. Revenue Recognition Definition is not a complex one, you can easily understand this concept on below paragraphs.
Why Revenue Recognition Criteria in Accounting
The revenue recognition implies the revenue amount that should be considered from a given transaction. Recognition refers to funds or cash flow to firm or claims to cash. It states that the amount recognized as revenue is the amount that is reasonably certain to be realized. Revenue recognition concept states that revenue from any business transaction should be included in the accounting records only when it is realized and relating to accounting period. The term realization means creation of legal right to receive money. Selling goods is realization, receiving order is not.
Revenue Recognition Methods are vary company to company and business methods. However proper Revenue Recognition Guide will directed by your auditor if you run any company. When revenue from business is said to have been realized and when cash has been really received or have a right to receive cash on the sale of goods or services or both has been created. The concept of realization states that revenue is realized at the time when goods or services are actually delivered. In short, the realization occurs when the goods and services have been sold either for cash or on credit. It also refers to inflow of assets in the form of receivables.
1. Gold maker got an order to supply gold it worth is $2,00,000/-. They
supplied gold worth is $2,00,000/- up to the year ending 31st December and rest of the gold were supplied in the month of January next year
Now we see how this concept is recognize the income-
The revenue for the year say 1st year for gold maker is $0,000/-. Mere
getting an order is not considered as revenue until the goods have been
2. Raj is trader of various goods, he sold goods for $10,000 for cash in 2012 and the goods have been sold during the same year.
The revenue for Raj for year 2012 is $10,000 as the goods have been delivered in the year 2005. Cash has also been received in the same year.
The revenue recognition criteria implies the legal liability to pay by the buyer or user.
Revenue Recognition Principle Importance-
This concept helps in making the accounting information more objective manner.
It provides that the transactions should be recorded only when goods are sold to the buyer or transferred from seller to buyer.
Revenue realization concept are follows the cost concept the change in assets value is to be recorded only when it realize the business, i.e. either cash has been received or a legal obligation to pay has been assumed by the customer. No Sale can be said to have taken place and no profit can be said to have arisen. This concept is important accounting concept. As it recognize the revenue in accounting records.
Useful External Link: Audit Procedure
Originally posted 2013-10-12 18:02:38.