It is the gross inflow of economic resources (whether cash, receivables, or other assets) arising from normal business activities of an entity whether it is the sale of goods or rendering of services. Although the revenue recognition policy varies from industry to industry, the basic principle of revenue recognition is as follows:
- Revenue from the sale of goods is recognized when the seller has transferred the possession and significant risks and rewards of ownership to the buyer; while
- Revenue from services is recognized on the performance of related services. If the services have not been provided completely at the period end then revenue will be recognized on the basis of the stage of completion (if determinable)
Moreover, revenue is only recognized if management believes that it will be able to recover it.