Question

Revenue recognition previously was based on the "realization principle." What were the two general criteria required by the realization principle that had to be satisfied before a company could record revenue?

Answer 1

The realization principle required evidence of an arrangement and delivery of goods or services before a company could record revenue.

Step-by-step explanation:

The two general criteria required by the realization principle before a company could record revenue are as follows:

1. Evidence of an arrangement: There must be a legally enforceable agreement between the company and its customer, which outlines the specific terms and conditions of the sale.
2. Delivery of goods or services: The company must have transferred control of the goods or services to the customer. This typically occurs when the customer takes possession of the goods or when the services are performed.

Once these criteria are met, the company can recognize revenue and record it in its financial statements.