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Revenue Recognition: Earned, realized, realizable

Adjusting entries seems to be a very important step in the accounting world. One of the adjustments that is made is associated with accrued revenue. The accrued revenue comes will normally arise when you perform work and you have not yet recorded the transaction in your accounts. The book does describe this situation.

But in order to actually record the "revenue" as earned revenue, there is a set of criteria that has to be met in order to determine if revenue was indeed earned. In order for revenue to be recognized, it has to be realized or realizable and earned.

What exactly is realized or realizable and earned? Why does these two standards have to be met?

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Realized means you have collected the cash for the work performed.

Realizable means you are likely to collect the cash for the work performed.

Earned means you have done the work for the customer or shipped the goods to them (title has passed).

Why does it have to be ...

Solution Summary

This discussion teases out the differences in these three critical terms and indicates how to decide when revenue should be recognized.