Final answer:
Revenue recognition requires that collection must be reasonably assured, which ensures companies do not recognize revenue prematurely when the payment is uncertain.
Step-by-step explanation:
For revenue recognition to occur, collection must be reasonably assured. This is in line with the general revenue recognition principle that revenue should be recognized when it is earned and realizable. The idea is that the company has performed its part of the deal by providing the goods or services and has a reasonable expectation of being paid for that work.
Under Generally Accepted Accounting Principles (GAAP), revenue is considered earned when all the following criteria are met: the critical events have occurred, the sale is substantially complete, the amount is determinable, and collection is reasonably assured. The requirement for collection being "reasonably assured" is designed to prevent companies from recognizing revenues from sales where the collectability of payment is dubious, which could result in overstated revenues and potentially mislead investors and other stakeholders.
The key term to focus on here is 'reasonably'; absolute assurance is not required, nor is it necessary that collection has already occurred. However, there should be a reasonable expectation that the debts will be settled within standard payment terms.