Revenue recognition

Definition

Revenue recognition is the accounting principle that dictates when and how revenue should be recorded in the financial statements. It ensures that revenue is recognized in the period it is earned, regardless of when the payment is received.

5 Must Know Facts For Your Next Test

1. Revenue should be recognized when it is realized or realizable and earned.
2. The timing of revenue recognition can impact a company's financial statements and potentially lead to fraudulent reporting.
3. Internal controls are essential to ensure accurate and timely revenue recognition.
4. The Sarbanes-Oxley Act requires companies to maintain proper documentation and internal controls for revenue transactions.
5. Violations of revenue recognition principles can result in significant penalties under the Sarbanes-Oxley Act.

Review Questions

• What are the key criteria for recognizing revenue according to standard accounting principles?
• How does improper revenue recognition relate to financial statement fraud?
• What role does the Sarbanes-Oxley Act play in ensuring proper revenue recognition?

Related terms

Accrual Accounting:

Revenue and expenses are recorded when they are earned or incurred, not necessarily when cash changes hands.

Internal Controls:

Procedures and mechanisms implemented by a company to safeguard its assets, ensure accurate financial reporting, and promote compliance with laws and regulations.

Sarbanes-Oxley Act:

A U.S. federal law enacted in response to corporate scandals, aimed at improving corporate governance and accountability through enhanced standards for internal controls, auditing, and financial disclosures.