Realisation Concept in Accounting: Definition, Importance, and Example
Understanding when to record income is crucial to maintain accurate financial records. The realisation concept, also known as the realisation principle, helps businesses know when to recognize revenue. This concept ensures that income is recorded only when earned, not when the money is received or when the order is placed.
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What is the Realisation Concept?
The realisation concept means that a business should record revenue only after it has completed the sale—that is, when the goods or services have been delivered and it is reasonably certain that the customer will pay.
This means that revenue is not recorded when the order is received or when the payment is made in advance. Instead, it is recorded only when the business has fulfilled its part, like shipping the product or providing the service.
This principle is a core part of accounting principles and helps maintain fairness and accuracy in financial records.
Why Is the Realisation Concept Important?
- Gives a true picture of income: Revenue is recorded only when earned. This avoids showing profits too early and gives a realistic view of how the business is doing.
- Maintains consistency in reporting: Using the same rule across all periods helps compare financial results month-to-month or year-to-year.
- Supports fair business practices: It prevents businesses from overstating income, which can mislead investors or tax authorities.
- Helps with legal and tax compliance: It aligns with standard practices and keeps businesses audit-ready.
- Improves decision-making: Accurate income reporting supports smart planning and financial management.
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Realisation Concept Example
Suppose a company that makes kitchen appliances receives an order on April 1st, delivers the appliances on April 25th, and gets payment on May 10th.
According to the realisation concept, the company should record the revenue on April 25th, when the appliances were delivered. This is the point where the company has fulfilled its part of the transaction.
Even though the order came earlier and the payment came later, the income is recorded when the delivery is completed—because that’s when the company earned the revenue.
This principle is commonly applied in financial accounting practices.
Realisation vs Matching Principle
While the realisation concept tells us when to record income, the matching principle explains when to record related expenses.
The matching principle says that expenses should be recorded in the same period as the revenue they helped generate. So, if a business earns revenue in April, the related costs should also be recorded in April.
Together, these two principles ensure that financial reports reflect the true profit of a business during a given time.
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Realisation Concept in Daily Business
In everyday operations, the realisation concept applies in various situations:
- Retail sales: Income is recorded when goods are delivered.
- Service providers: Revenue is recorded upon completion of the service.
- Installment plans: Full revenue is recorded upon delivery, not as each installment is received.
Following this concept ensures clarity and avoids confusion about when income was truly earned.
Conclusion
The realisation concept in accounting helps businesses record revenue at the right time—when it is earned, not before. This builds consistency, transparency, and trust in financial reporting.
Whether you own a small shop, provide services, or manage accounts for a larger company, applying this concept helps maintain accurate records and avoid incorrect profit reporting or compliance issues.
To simplify this process, consider using cloud accounting software that follows standard accounting rules automatically.
As a Chartered Accountant with over 12 years of experience, I am not only skilled in my profession but also passionate about writing. I specialize in producing insightful content on topics like GST, accounts payable, and income tax, confidently delivering valuable information that engages and informs my audience.
