Short definition: Revenue recognition is an accounting principle that outlines the specific conditions under which revenue is recognized and recorded in a company’s financial statements.
Explanation: It determines when revenue is considered earned and realized or realizable, allowing for a consistent and accurate representation of a company’s financial performance. The core principle is that revenue should be recognized when it is earned and realized or realizable, regardless of when cash is received.
Example: A software company that sells a subscription-based product might recognize revenue over the subscription period, even if the customer pays upfront for the entire year.
Additional information (optional): Revenue recognition standards can be complex and vary depending on the industry and type of transaction. Companies must adhere to relevant accounting standards like GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) when recognizing revenue.