Revenue Recognition
The accounting principle determining when revenue is recorded.
Revenue recognition determines the specific conditions under which revenue is considered earned and can be recorded in the financial statements. Under ASC 606, revenue is recognized when a performance obligation is satisfied—meaning the promised good or service has been transferred to the customer. This five-step model applies to all contracts with customers regardless of industry.
Example
A software company sells a $12,000 annual license—under ASC 606, it recognizes $1,000 per month as the performance obligation (providing access) is satisfied over time, not $12,000 upfront.
Why It Matters for Your Business
Incorrect revenue recognition can overstate income, mislead stakeholders, and trigger IRS or SEC scrutiny—getting it right is fundamental to accurate financial reporting.
Related Terms
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which revenue equals costs.
Budget
A financial plan estimating income and expenses.
Financial Forecast
A prediction of future financial performance.
Capital Expenditure
Funds used to acquire or upgrade physical assets.
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