Revenue Recognition
The accounting principle determining when and how income is recorded, requiring revenue to be recognized when companies satisfy performance obligations to customers.
Revenue Recognition
The accounting principle that determines when and how income is recorded in financial statements, requiring revenue to be recognized when (or as) companies satisfy performance obligations by transferring promised goods or services to customers.
For example, an equipment manufacturer would recognize $500,000 in revenue when it delivers specialized machinery to a customer, even if payment terms allow the customer to pay in installments over the next six months.
Modern revenue recognition follows a five-step process: identify customer contracts, identify performance obligations, determine transaction price, allocate price to obligations, and recognize revenue when each obligation is satisfied. This approach ensures that financial statements accurately reflect when value is delivered to customers, not just when cash changes hands, providing more consistent and comparable reporting across different business models and industries.