Financial Accounting 101: Revenue Recognition Principle - Accrual Accounting Basis

This is a detailed description of the Revenue Recognition Principle in Accrual Basis Accounting. We go through the three situations created by this principle and the journal entries that go along with them.
According to the Revenue Recognition Principle, revenues should be recognized (measured / recorded in the accounting system) when they are EARNED (or when the company has fulfilled its obligation to perform the service as promised).
All companies expect to receive cash in exchange for goods and services - it’s why they’re in business! But the timing of when they receive this cash does NOT dictate when revenues are recognized. What matters is when the sale/service is performed.
Three possible cases exist:
1. Cash BEFORE sale / service
When we receive the cash, but have not performed the service:
Dr. Cash
Cr. Unearned Revenue
After we have performed the service, we can recognize the revenue:
Dr. Unearned Revenue (Kill)
Cr. Revenue
2. Cash WITH sale/service
When we receive cash and perform the service at the same time (no timing difference exists)
Dr. Cash
Cr. Revenue
3. Cash AFTER sale/service
When we perform the service (and can recognize revenue), but our customer owes us:
Dr. Account Receivable
Cr. Revenue
After we have received the cash from our customer:
Dr. Cash
Cr. Account Receivable (kill)
Don't complicate these timing differences. Start with 2 questions:
-Did I receive cash?? - Easy to plug into a journal entry
-Did I complete the sale/service?? - Let's us know if we recognize revenue
Then ask:
-Do I owe my customer (if they paid first)? - then it's a liability
-Does my customer owe me (I delivered the service first)? - then it's an asset

[@SatishKumar-py3yo]

Perfect..

[@mustafaeltgani844]

Very good explanation. Saved me a lot of time

[@roseb.5367]

Thank you sooooo much for this clarity

[@RahimRahim-zm8ro]

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