Four Criteria for Revenue Recognition

Recognizing revenue means to record the existence of revenue on the accounts. Cash basis accounting recognizes revenues when cash is received. Accrual basis accounting, which is so much more prevalent as to be near universal, has strict but simple rules on when revenues should be recognized.

First Criteria

The first criteria for recognizing revenue is that evidence must exist supporting the conclusion that the transaction in question has indeed produced revenue. For example, a consignment sale to a consignee cannot be considered revenue because the consignor is considered the owner of the consignment goods and said goods have yet to be sold to their final intended consumers.

Second Criteria

The second criteria for recognizing revenue is that it must have been earned. Earned means either that the good has been delivered and received or that the service has been performed for the consumer.

Third Criteria

The third criteria for recognizing revenue is that its value must be able to be determined at present. For example, if a business is uncertain as to how much it will receive in payment for services that it has rendered as a result of legal confusion or some other matter, then it cannot recognize revenue because it is too uncertain.

Fourth Criteria

The fourth criteria for recognizing revenue is that it must be realizable, meaning that there exists the reasonable expectation that payment will be received on what is owed. For example, revenues produced through selling goods to a bankrupt business cannot be recognized because there is little assurance that the seller will actually receive payment for its goods.