A fundamental matter for many companies is when to
recognize revenue. Revenue recognition generally occurs (1) when realized or realizable and (2) when earned. This approach has referred to as the revenue recognition principle.
An establishment realizes
revenues when it exchanges products or services,
merchandise, or other assets for cash or claims to cash.
Revenues are realizable when assets received or held are readily convertible into known
amount of cash or claims to cash. Assets are readily convertible when they are salable or
interchangeable in market at readily determinable prices without significant further
cost.
In addition, a company delays recognition of revenues until earned. Revenues are considered earned
when the company substantially accomplishes what it must do to be entitled to the benefits
represented by the revenues. Generally, the
point of sale at which a company recognizes revenue. The sale provides an objective and
verifiable measure of revenue—the sales price Recognition at the time of sale provides a uniform and reasonable test.