The accounting principle that determines when and how revenue is recorded in the financial statements, based on when it is earned rather than when cash is received.
Under Ind AS 115 / IFRS 15 / ASC 606, revenue is recognized when performance obligations are satisfied — i.e., when control of goods or services transfers to the customer. The five-step model is: 1) Identify the contract, 2) Identify performance obligations, 3) Determine transaction price, 4) Allocate price to obligations, 5) Recognize revenue when obligations are satisfied. This is critical for subscription businesses, long-term contracts, and multi-element arrangements.
A SaaS company receives ₹12,00,000 for a 12-month annual subscription in January. It recognizes ₹1,00,000 revenue each month (not the full amount in January), as the service is delivered over time.
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Revenue must match when the service/product is delivered, not when cash is received. Recording all revenue upfront would overstate current period performance and understate future periods.
Products: typically at the point of delivery/transfer of control. Services: over time as the service is performed. Subscriptions: ratably over the subscription period.
An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.
Payment received from a customer for goods or services that have not yet been delivered, recorded as a liability until the obligation is fulfilled.
A financial statement that summarizes a company's revenues, costs, and expenses over a specific period to show net profit or loss.
An accounting principle that requires expenses to be recorded in the same period as the revenues they help generate, ensuring accurate profit measurement.
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