Realization definition
/What is Realization in Accounting?
Realization is the point in time when revenue has been generated. Realization is a key concept in revenue recognition . Realization occurs when a customer gains control over the good or service transferred from a seller.
Realization Indicators
There are numerous indicators of when realization can occur, such as the following:
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When the seller has the right to receive payment.
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When the customer has legal title to the transferred asset .
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When physical possession of the asset has been transferred by the seller.
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When the customer has taken on the significant risks and rewards of ownership related to the asset transferred by the seller.
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When the customer accepts an asset.
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When the customer can prevent other entities from using or obtaining benefits from the asset.
Related AccountingTools Courses
Example of Realization in Accounting
A furniture manufacturer, Wilson Furniture, produces and sells custom-made wooden tables. It experiences the following transactions:
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Order received . On January 5, a customer places an order for a table worth $1,000. No revenue realization occurs yet, because no goods have been delivered.
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Production and delivery . The company manufactures the table and delivers it to the customer on January 20.
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Invoice issuance . An invoice is sent on January 20, with a 30-day payment period. Revenue is recorded on January 20 (the date of delivery), not when the order was placed or when the payment is received.
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Payment receipt . The customer pays on February 15. The payment date does not affect the revenue recognition, since it was already recorded in January.
