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Realization concept in accounting is also known as revenue recognition principle.
Revenue should be recognized at the time when goods are sold or services are rendered
irrespective of whether cash from the transaction has been received or not.
In case of sale of goods, revenue must be recognized when the seller transfers the risks and
rewards associated with the ownership of the goods to the buyer.
In case of the rendering of services, revenue is recognized on the basis of stage of completion
of the services specified in the contract.
The realization concept tells us that to recognize revenue, it has to be realized. Hence revenue
is ‘realised’ not necessarily when money is actually received’.
Example –
1. Mr. Rushie places an order to Mr. Gaurav for supply of certain goods. Mr. Gaurav sends
goods to Mr. Rushie 15 days after he has received the order and Mr. Rushie makes payment
10 days after receipt of goods. In this case the sale will be presumed to have been made not at
the time of receipt of the order for the goods or receipt of payment but at the time when
goods are delivered to Mr. A.
2. Motors PLC is a car dealer. It receives orders from customers in advance against 20%
down payment. Motors PLC delivers the cars to the respective customers within 30 days
upon which it receives the remaining 80% of the list price.
In accordance with the revenue realization principle, Motors PLC must not recognize any
revenue until the cars are delivered to the respective customers as that is the point when the
risks and rewards incidental to the ownership of the cars are transferred to the buyers.

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