Consider the case of a company that manufactures and sells bed linens online. In accounting, revenue from these finished goods has been said to be realized at the time they are provided to the customer, not at the time they are manufactured or at the time orders are put by customers.
Guess that in 2009, comforters had been produced. In January 2010, a customer positioned an order of these products. The goods had been provided in February 2010. When is revenue realized? The revenue is recognized in February.
While you may surmise, in the case of a company that offers services, rather than products, revenue is recognized at the time the services are decorated or rendered and not at the time it was contracted.
Guess that in January, Wall structure Treatments Limitless agreements to install valance table and curtains to Mrs. Williams windows. The valance table and the window curtains had been installed in February. Mrs. Williams pays the price in March. In what month would Wall structure Treatments Limitless identify revenue? Wall Treatments Limitless would identify income in February.
The fact that income is acknowledged at the time it is realized is called the realization idea. This realization idea informs us when to identify income.
Revenue is recognized when a sale is consummated through the shipping of products or services. Simply because of this, the word “sales” is oftentimes utilized as a synonym for income, and sometimes you will see the expression “sales income.”
As in the situation of expenses, income may be recognized before, throughout or after the time period in which the associated cash invoice falls. To start with, allow us to think about a situation in which income is recognized in the exact same period as that in which the associated increase of cash happens.
Utilizing the exact same example above, in January, Wall Remedies Limitless installed valance board and window curtains at Mrs. Jones house; Mrs. Williams pays $100 cash. In keeping with the double aspect concept, this transaction will have two effects on the accounts of Wall structure Remedies Limitless. It will change each side of the equilibrium page – i.e., the assets and the equities.
This transaction will impact the Cash item on the asset part of the Wall structure Treatment Limitless equilibrium sheet. Which is, the subsequent changes would be made: Cash raises by $100; Owner’s Equity raises by $100.