Revenue is only revenue (or profit) when it can calculate, that is, recognized and realized. Other says that, the actual profit that company already earn in present time. Forecasting or prediction isn’t revenue recognition.
A company that, for example, functions in the retail industry, buys an inventory. It can predict how much money the inventory will make.
But this prediction is only on paper, it does not mean that the company may actually make that money.
Economic, natural or legal conditions can change profits drastically and the revenue earned is not finalizing if it hasn’t been earned yet.
In accounting Terms
Revenue is recognized only when the inventory has been sold. The company may not have that amount in cash yet, some revenue can even be made in installments.
But the company is certain to have made that revenue, and this is known as the Revenue Recognition.
A company (Co-working space) receive the rent of 2 months per seat of $200 customers is 70, so if want to know about company’s revenue recognition then $7,000 [($200 ÷ 2) × 70].
You can also add advance payment in RR, but not credit income.
Types of Revenue Recognition
Revenue recognized can be of two kinds,
- Accrued Revenue
- Deferred Revenue
It is the revenue that the company is bound to get, or the company knows it will get before the revenue has actually been received as cash.
An example is that, if a company sells products on credit, such as a wholesaler supplies inventory for a retail business, he might not get cash for it immediately.
Rather, the wholesaler might sell the inventory within a fixed time period’s credit. Since the wholesaler is certain to get the cash, it is known as Accrued Revenue.
Deferred revenue is the revenue that is obtained in cash.
As for the above example, the wholesaler, when he gets paid for the inventory, would refer to his revenue as Deferred Revenue.
Editing in cash recognition value or changes in annually balance sheet for any type of service or goods rerun.
The simple way of sold out things in credit, and must enter in the balance sheet or account of loss and profit.
Understand the unearned income with examples. Understanding the concept under liabilities and accrued income or deferred income.
The main difference between Unearned income or Accrued is the key to understanding the Assert and liabilities principal.
More detail you can get https://www.investopedia.com/terms/r/revenuerecognition.asp
And Faqs and Figure https://www.fasb.org/jsp/FASB/Page/ImageBridgePage&cid=1176169257359