The first case is known as accrued revenue, and in the second case, you will see this referred to as deferred revenue. The cash is paid and now the service can be provided.The service is provided and then the cash will be paid.So, it is not related to the receipt of cash. Revenue is deemed to be realized when ownership of goods has been transferred to the purchaser and when the purchaser has legally become liable to pay the amount. Under accrual accounting, you book the revenue when you earn it based on the invoice or the contract with a customer, not when you get paid.

In most cases, this happens when a company decides to attract outside funds and needs to present its financial reports to the investors. There is usually a point in time where a business will have to migrate its books and records to accrual accounting, which is another method to account for business transactions. Unfortunately, cash accounting is not compliant with the US GAAP and that is why it is used only by small businesses. This is because the cash basis of accounting is very simple. If your business is using the cash basis of accounting, then it is really easy to compute the revenue when the cash hits the cash register or the bank account. If you are running a small business, you are most likely recognizing revenue using the cash accounting method. Thus, revenue recognition is essentially the acknowledgment of income. Recognition is the acknowledgment of somethingвЂ™s existence. It is an increase in a companyвЂ™s resources from the provision of goods and services. Revenue is the income generated from the sale of goods and services. Revenues are created from day-to-day activities that a business was created to do, whether it is manufacturing and/or selling goods or providing services. As we all know, earning revenue is the purpose of doing business.

Revenue recognition principle