Revenue Recognition Principle states that revenue should only be recognized when the risk and rewards associated with the goods and services has also been transferred to the buyer. This concept is a cornerstone of accrual basis of accounting as revenue is recognized only when an item is sold and not when the payment is received.
Example
1. Alpha industry sold a truck to the customer on December 2015. However, it was delivered from Alpha showroom to the client on 10th January, 2016. The sale would not be recorded in the month of December but in January as the truck was delivered in the January.
2. Gamma is a retail store. A customer bought some grocery from the retail store on 30th June 2015 via credit card. The bank statement of Gamma shows the sale figure in the month of July as credit card automated fund transfer takes a day or two in the company’s bank account. Though, the cash was received in July, the sale would be recorded in the month of June as the goods were transferred to the buyer at the time of sale.