An accounting concept that implies that revenue is considered to be earned (realized) once goods or services are sold/ delivered to customers in return for payment of the price (cash sales) or receipt of a claim to that effect (credit sales). In other words, revenue will not be treated as earned unless a sale actually takes place and payment is either made or deferred against a claim (in line with accrual basis accounting). In short, revenue is recognized when it is earned. This concept prevents an entity from posting profits on pending transactions or events.
According to this accounting concept, gains can be classified as holding gains and trading (operating) gains. The former is supported by a claim (issue of a claim on future revenue) while the latter is evidenced by immediate payment of the price.
However, there are exceptional cases where this concept doesn’t hold. For example, revenue is recognized before completion of the work in a long term contract work-in-progress. Likewise, in hire-purchase transactions, revenue is recognized in proportion to installments as part of the contractual price.
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