What Is Revenue Recognition?
Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and determines how to account for it. Revenue is typically recognized when a critical event has occurred, when a product or service has been delivered to a customer, and the dollar amount is easily measurable to the company.
- Revenue recognition is a generally accepted accounting principle (GAAP) that stipulates how and when revenue is to be recognized.
- The revenue recognition principle using accrual accounting requires that revenues are recognized when realized and earned–not when cash is received.
- The revenue recognition standard, ASC 606, provides a uniform framework for recognizing revenue from contracts with customers.
Understanding Revenue Recognition
Revenue is at the heart of all business performance. Regulators know how tempting it is for companies to push the limits on what qualifies as revenue, especially when not all revenue is collected when the work is complete. For example, attorneys charge their clients in billable hours and present the invoice after work is completed. Construction managers often bill clients on a percentage-of-completion method.
The revenue recognition principle, a feature of accrual accounting, requires