Revenue recognition helps companies decide in which year they're allowed to record revenue The rule says that you can recognize revenue upon delivery or service performance What does this mean? Well when the customer is actually delivered their products, fantastic! The company can then recognize it's revenue Or with service performance, maybe if we looked at an airline company The flight takes off, the customer receives the service that they required; the air line company can now recognize revenue However these companies have a slight problem because the sales (on the income statement) and their cash flows (on the cash flow statement) are often at different times So the question mark is, when can I actually record the revenue? And we can find it could be last year, this year or next year Let's look at three examples The first one we have here is a retailer, let's say its a T-shirt retailer On one particular day a customer may come in, buy a t-shirt, so the product is delivered They pay in cash so the retailer receives cash and thus the retailer can recognize revenue on that day What was it that meant the retailer could recognize the revenue? It was delivery of the product, it was nothing to do with the cash So a relatively straight forward one there A little bit harder is a hotel Let's say a customer makes a booking and let's say that's in December of year 1 The hotel receives cash from the customer in December of year 1. It's very tempting for the hotel to think "Oh okay I've got the cash, I can recognize their revenue now". But no you can't do that because the customer stays in the hotel in January So the service is delivered in January we're only allowed to recognize that revenue thus in January and that is of year 2 A similar problem happens with manufacturers Here we've got a manufacturer, it delivers a product to a customer maybe in November of year 1 But they then give the customer 3 months to pay their bill. So the manufacturer only receives cash in February the next year (of year 2) Again a bit of a question mark, am I allowed to recognize revenue when I delivered the products in year 1? Or when I received the cash in year 2? It's always delivery of the product