Revenue Recognition

The revenue recognition principle is a core rule in accrual accounting.
Revenue must be recorded when a performance obligation is satisfied, not when cash is received.
A performance obligation is considered fulfilled when a company delivers the goods or completes the service, regardless of when the customer pays.
Under this principle, revenue is recognized when the seller earns the right to payment, typically at the point of sale or service delivery.
For instance, consider Sarah ordered a bookshelf that was on back order from a furniture store on the fifteenth of October and paid the full one hundred dollars in advance.
The bookshelf is delivered and assembled at her home on the tenth of November.
Under accrual-based accounting, the revenue is recorded in November, when the product is delivered and the performance obligation is fulfilled.
While accrual accounting follows this principle, some businesses use cash-basis accounting. In that method, revenue is recognized only when cash is received.
The revenue recognition principle ensures that financial statements accurately and consistently reflect a company’s financial performance over time.