Principles of Revenue Recognition

Principle of revenue recognition is also included in general accounting principles with other common principles. This is one of the basic principles of accrual accounting. According to this principle the revenue is comprehend for a certain period of time whether the cash regarding this revenue is collected or not. As we know in a business not all the transactions are fulfilled on the bases cash on delivery, sometimes goods and services are delivered but payment is not made on the spot. It may take some time or sometimes months to make payment and sometimes the payment in made in installments. However whether the entire payment is made or not the revenue is definitely earned and belongs to that specific period. This revenue is needed to be calculated and entered in the books of accounts. This type of revenue is called “accrued revenue” as it states that goods or services have been delivered but the payment is not made yet.

Another principle contrary to accrued revenue is that of deferred revenue where the payment is made by the customer but goods or services are not yet delivered by the customers. This principle has a direct relation with “Matching Principle” that is also termed as the cornerstone of accrual accounting and matches the revenues and expenses of a certain financial period of the business. The basic goal of this principle is to match the earnings and expenses exactly to that period in which they are occurred irrespective of received or out-standing cash.