What does “revenue recognition” define in accounting?

Revenue recognition in accounting is a critical principle that determines the specific conditions under which revenue can be reported in financial statements. It essentially dictates that revenue should be recognized when it is earned and realizable, regardless of when the cash is received.

This principle is pivotal for providing an accurate picture of a company's financial performance during a specific period. For instance, under the accrual basis of accounting, revenue is recognized at the time a service is performed or goods are delivered, and an obligation to pay exists. This ensures that financial statements reflect the organization’s true economic activity, allowing stakeholders to make informed decisions based on actual performance rather than cash flow timing.

Understanding this concept helps ensure compliance with accounting standards, such as generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS), which are aimed at providing consistent and comparable financial information across different entities.