Revenue Recognition Principle
The rule that revenue should be recorded when earned (upon satisfying performance obligations), not necessarily when cash is received from customers.
Revenue Recognition Principle
The accounting principle specifying that revenue should be recognized when it is earned (when a performance obligation is satisfied), not necessarily when cash is received.
For example, a subscription service company that collects $1,200 upfront for an annual subscription would recognize $100 of revenue each month as the service is provided, rather than recording the entire $1,200 when the payment is received.
Modern revenue recognition standards follow a five-step process: identify the contract, identify performance obligations, determine transaction price, allocate price to obligations, and recognize revenue when each obligation is satisfied. This approach ensures revenue reflects the transfer of promised goods or services to customers.