Revenue Recognition Principle Importance

In accounting the terms sales and revenue can be and often are used interchangeably to mean the same thing.

Revenue recognition principle importance. Today s financial world puts a great emphasis on meeting targets. For example subscription businesses tend to bill customers for services rendered over a period of time. For example if you sell a saas product you might have a customer pay upfront for an annual contract lucky you though they receive the services of that subscription on a. Revenue recognition principle for the provision of services one important area of the provision of services involves the accounting treatment of construction contracts.

Why understanding the revenue recognition principle is important in order to produce accurate financial statements it s important to understand and properly use the revenue recognition principle. By showing revenue when it is earned and connected to the expense that was necessary to earn the revenue you as a small business owner can much more easily see how profitable. The principle of revenue recognition has long been the domain of the finance department but it has such a major impact on the overall success of a business that when it is not properly adhered to or managed it not only hits the balance sheet it can also make front page news. In other words companies shouldn t wait until revenue is actually collected to record it in their books.

Revenue recognition is an accounting method for big contracts and upfront payments situations where the customer pays in full before actually receiving the whole service. Revenue should be recorded when the business has earned the revenue. The revenue recognition principle has another very important purpose which is to ensure that the cause and effect relationship of expenses and revenue is very clear. Revenue recognition is a generally accepted accounting principle gaap that stipulates how and when revenue is to be recognized.

These are contracts dedicated to the construction of an asset or a combination of assets such as large ships office buildings and other projects that usually span multiple years. From the perspective of those who run businesses and their employees it can mean the difference between a large bonus or being let go. Revenue recognition is an accounting principle that outlines the specific conditions under which revenue sales revenue sales revenue is the income received by a company from its sales of goods or the provision of services. The revenue recognition principle states that revenue should be recognized and recorded when it is realized or realizable and when it is earned.

There are several situations where accurate revenue recognition can help a subscription business operate more efficiently.