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Revenue Recognition

What Is Revenue Recognition?

Revenue recognition refers to when and how your business accounts for the money it collects.

Properly recognizing income can be more difficult for companies that use accrual accounting than cash-basis accounting, as many startups do. But it’s important for understanding the financial health of your business.

For businesses that collect money before or after providing a product or service, revenue may be categorized in different ways. For example, accrued revenue is money that you’re owed for products or services you’ve already delivered. Conversely, deferred revenue is money that you’ve collected for a product or service you haven’t delivered yet. 

To comply with generally accepted accounting principles (GAAP), you can only recognize the income as earned once you’ve received payment, and the product or service has been delivered.

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