Realization vs Recognition
The words recognition and realization are used individually in many contexts but when they are used in combination it is definitely in context of accounting. Both these words can be used to define revenue, taxes, profit or loss of a company. A company that is running its business in a profitable way turns its inventory into cash by selling the products or services and it’s the recognition of revenue through this process. Once the recognition of the revenue is over the entries of the transactions is made formally in the account books and if the books show profitability then it is the realization of the revenue. As the business is carried out and profit is earned the tax liabilities also accumulate. The recognition of the tax liability is seen by the company during the period business is carried out and its realization takes place once accounting books are formally prepared and the amount is paid to the government.
Recognition of the revenue is a continuous process in a profitable business and is calculated by subtracting the expenses incurred in carrying out the business from the revenues generated. If profitability is not there in business then it is the realization of losses that are to be observed. A company’s recognition of revenue is not dependent on the way the business is carried out like it’s a cash sale or credit sale. As soon as a credit sale takes place revenue is recognized and is not depended on the time when payments will be received.
Realization of the revenue starts only after recognition of the revenue ends. Whether it is profit or loss the realization is reported formally in the account books. Realization of the revenue is the accurate figure and a true indicator of the health of the company. Realization of revenues is immediate in a cash business but in business carried out on credit realization is made when payments are received.
Recognition vs Realization
• Recognition is a continuous process and realization is the process that ends recognition.
• Recognition is an estimate but realization is accurate and exact.
• Recognition is not dependent on business pattern but realization is different in cash and credit type.
• Recognition is used to see where company is heading but realization clearly shows it.
• Recognition can be manipulated by deferring expenses but realization can not be manipulated.