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:
When the seller has the right to receive payment.
When the customer has legal title to the transferred asset.
When physical possession of the asset has been transferred by the seller.
When the customer has taken on the significant risks and rewards of ownership related to the asset transferred by the seller.
When the customer accepts an asset.
When the customer can prevent other entities from using or obtaining benefits from the asset.
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Example of Realization in Accounting
A furniture manufacturer, Wilson Furniture, produces and sells custom-made wooden tables. It experiences the following transactions:
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.
Production and delivery. The company manufactures the table and delivers it to the customer on January 20.
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.
Payment receipt. The customer pays on February 15. The payment date does not affect the revenue recognition, since it was already recorded in January.