IT Financials Glossary

Recognition

Posted in Accounting by mgentle on August 26, 2010

Recognition: the financial term used to signify that an income or an expense is “real” from an accounting perspective. Under accrual accounting, a company can recognize revenue once it has sold a product or delivered a service, even though it has not yet been paid.

But there are exceptions. For example, if a SaaS vendor (that normally invoices clients for monthly usage) negotiates a contract in which the client pays the first year’s subscription upfront, then it can only recognize 1/12th of this amount each month, even though the entire one-year amount is sitting in its coffers. Another example would be an integrator working on a high-value, fixed-price ERP project; because of the risk associated with this type of project, the integrator might decide to only partially recognize milestone payments already received, and wait till the end of the project before recognizing the full amount.

The proverb “don’t count your chickens before they are hatched” is the farmer’s equivalent of revenue recognition.

Just as for revenue, accrual accounting allows for costs to be recognized when they are incurred, even though the invoice has not yet been paid (see Fig. 6.2b for an example).

FURTHER READING: for an accounting view of recognition, with explanations of things like pre-paid expenses and deferred revenue,  check out the following article by Michael Sack Elmaleh.

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One Response

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  1. Accruals said, on April 5, 2011 at 15:35

    […] enable revenue or expenses to be recognized before payment […]


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