Revenue recognition is the accounting principle that determines when revenue is recognized and recorded in the financial statements. This principle is crucial for accurately reflecting a company’s financial performance and position.

Characteristics
– Timing: Revenue is recognized when it is earned, regardless of when cash is received.
– Measurement: Revenue must be measurable and collectible to be recognized.
– Performance Obligations: Revenue is recognized when a company satisfies a performance obligation, such as delivering goods or providing services.

Examples
– Product Sales: A company sells a product and recognizes revenue at the point of sale when the customer takes possession of the item.
– Service Contracts: A consulting firm provides services over a six-month period. Revenue is recognized monthly as the services are performed, rather than all at once at the end of the contract.
– Subscription Services: A software company charges an annual fee for its service. Revenue is recognized monthly over the subscription period, reflecting the ongoing service provided.