Realization Principle of accountig

A very important issue is that when the profit should be considered? This realization principle of accounting is one of the pillars of modem accounting; it gives birth to the Accrual System of Accounting.

This principle guides that the profit should be realized when the goods are transferred to the buyer. According to this concept, revenue should be recognized when goods are sold or services are rendered, Whether cash has received or not. Similarly, an expense should be recognized when goods are bought or services are received, whether cash has paid or not.

According to this concept, revenues are not recognized unless they are realized. The point at which the revenue is realized will vary depending upon circumstances. For example, revenue is realized when goods are delivered to customers and not when the contract is signed to deliver the goods.

Example

If Mr. A sold goods worth of $2,000 to Mr. B, the later agrees on the proposal that goods will be transferred after 15 days. After receiving goods Mr. B makes payment after 10 days. Here according to Realization Principle of Accounting, sales are considered when the goods are transferred from Mr. A to Mr. B.

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