Revenue Recognition

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Revenue Recognition

Revenue recognition is an accounting principle that outlines the specific conditions under which revenue is recognized. In theory, there is a wide range of potential points for which revenue can be recognized. Therefore, IFRS outlines the criteria for revenue recognition with customers. This guide will address recognition principles for both IFRS and U.S. GAAP.

The revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the accounting principles, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.
Cash can be received in an earlier or later period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:

  • Accrued revenue: Revenue is recognized before cash is received.
  • Deferred revenue: Revenue is recognized after cash is received.