Why Is Revenue Recognition Important

The purpose of this article is to explain one important accounting principle which is the revenue recognition principle. As a reporter, this will help to analyze companies charged by the SEC for accounting schemes related to revenues and will allow you to ask more meaningful interview questions.

Accounting Practices and GAAP – Revenue Recognition

The revenue recognition principle conveys specific conditions or circumstances under which a company may recognize revenue. Revenue recognition principle is very important because an entity can mislead investors by recognizing its revenue too early. For example, a rental property entity can only recognize revenue after they have provided the rental place. In many cases, tenant may pay the rent ahead of time, but according to the revenue the entity can only recognize the cash as revenue at the end of the month after the tenant have used the space. General Electrics, for instance, settled with SEC on 2009 an accounting and revenue recognition scheme; GE was charged by the SEC for violating accounting guidelines by accelerating revenue recognition. They misled inventors by making their revenue appear healthier.

“Earned” means that the product has been delivered to the clients’ hand or the service is completed.

The Four Criteria for Revenue Recognition

To understand how an entity should recognize revenue, it is fundamental that you understand the four criteria for revenue recognition:

1. The entity must show an evidence of the sale or service that was performed

2. The entity must have delivered the product or performed the service to the