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Revenue is the increase in resources from the provision of goods and services. The revenue principle, also known as the revenue recognition principle, is one of the most widely accepted principles. By definition, the revenue principle is an accounting rule whereby income is recorded when it is earned, regardless of when the cash is actually received by the business (Business Dictionary). Essentially, say someone pays for a service that costs $50, the service company, although they will not expect the payment for a few weeks, the $50 is still considered revenue because the company has earned it due to the services they had previously provided.
- Accrued revenue is when cash is received AFTER revenue is earned.
- Deferred revenue is when cash is received BEFORE revenue is earned.
However, if there is any doubt that
a customer will honor their payment, then the company has the option to not record that
they have earned revenue until they have actually received the payment from the
customer. For a new and upcoming accountant, this is crucial to remember, so a revenue payment is not missed within the analysis. Some accountants may not realize this, and the revenue for the month would be a little off, and not accurate for the company. Even the smallest, and simplest principles can make a large difference in the analysis of a firm.
Citations:
Business Dictionary
Accounting Tools
Revenue Recognition Principle- YouTube
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