Let us start with understanding what is revenue recognition in simple terms.
It is a generally accepted accounting principle of contract sharing details on how and when revenue is recognized. Revenue recognition takes place when a product or service is sold, the revenue is recognized and the customer makes the payment.
Now, comes the question of who sets the rules for accounting and bookkeeping.
The International Financial Reporting Standards (IFRS) sets the rules for accounting by regulating how transactions are recorded in financial statements.
IFRS has a very simple 5 step rules of revenue recognition.
It is important for a business to structure its revenue recognition not only to have a clear understanding of where the revenue comes from, goes to, helps them understand, and how to save but also to arouse interest amongst the investor.
As shared by the Financial Accounting Standards Board (FASB), the motive behind revenue recognition is “to report financial statements of revenue from contracts with customers.”
Revenue recognition accounting helps a business to shape how it perceives the business’s performance and also aids in reporting it accurately.
Accurate revenue recognition is critical for every business, even for a small private business as it provides a complete picture of cash flow and secures a healthier financial future. To illustrate, Revenue Recognition accounting helps subscription-based businesses tackle instances where a customer cancels before the stipulated time or switches to another plan in between the cycle. Deferred Rollforward helps businesses towards better Revenue Forecast.
However, revenue recognition gets intricate when this 5-step principle is not honored, especially, in industries like real-estate, media, technology, construction, and entertainment.
Some businesses struggle to keep up with the new revenue recognition requirements and fail to stay compliant with the standards. The business should be aware of the fact that bad revenue accounting is also an indication of other internal problems.
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