Revenue Is Recognized When It Is Earned And Expenses When They Are Incurred

Collection must be reasonably assured to recognize product or service revenue.

Revenue is recognized when it is earned and expenses when they are incurred. The accrual method of accounting is used by most of the entities as it records the past transactions regarding the revenue and expense but it also predicts the cash receipts and payments expected to arise in the future. For example a merchandiser s sales revenues are considered earned when the goods have been shipped or delivered to the customers. The revenue recognition principle a feature of accrual accounting requires that revenues are recognized on the income statement in the period when realized and earned not necessarily when cash. Revenues which are derived from an entity s main activities such as the sale of merchandise or the performance of service are considered to be earned when the earning process has been substantially completed.

Revenues and matching expenses. In some cases it is clear when these conditions have been met and the revenue earned should be recorded. According to the principle of revenue recognition revenues are recognized in the period when it is earned buyer and seller have entered into an agreement to transfer assets and realized or realizable cash payment has been received or collection of payment is reasonably assured.