Realization Principle
The accounting rule that revenue should be recognized only when earned and collection is reasonably assured.
What is Realization Principle?
The realization principle states that revenue should be recognized only when it has been earned and collection is reasonably assured — not simply when cash is received or a sale is promised. This principle underlies modern revenue recognition standards and prevents companies from booking revenue prematurely. It works in tandem with the matching principle to ensure financial statements reflect economic reality.
Example
A software firm receives $120,000 upfront for a 12-month subscription. Under the realization principle, it recognizes $10,000 in revenue each month as services are delivered, recording the remainder as deferred revenue until earned.
Source: FASB ASC 606 — Revenue from Contracts with Customers