Definition
Revenue Recognition
Revenue recognition is the accounting principle determining when and how much revenue a company records, based on the transfer of goods or services to customers.
Under Ind AS 115, revenue is recognised when control of goods or services passes to the customer, following a five-step model that allocates the transaction price to performance obligations. This replaced older rules and tightened how and when revenue can be booked.
Revenue recognition is a frequent locus of accounting manipulation, through premature or fictitious sales, channel stuffing or aggressive percentage-of-completion estimates on long projects. Analysts cross-check reported revenue against cash collections and receivable days to test its quality.
Related terms
- Receivable Days (DSO)Receivable days, or days sales outstanding, measure the average number of days a company takes to collect payment from its customers after a sale.
- Accruals (Accounting)Accruals are revenues earned or expenses incurred that are recognised in the accounts before the related cash is received or paid, following accrual accounting.
- Deferred RevenueDeferred revenue, or unearned income, is money received from customers for goods or services not yet delivered, recorded as a liability until earned.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.