There are a couple different ways that companies can choose to record revenue, and the method that's best depends on the individual business. In general, though, most businesses either use the accrual method or the cash method.
The accrual method records revenue when it's earned, regardless of when the money is actually received. So, if a company sells a product on credit, the revenue from that sale would be recorded as soon as the product is shipped, even if the customer doesn't pay for it until later. The cash method, on the other hand, records revenue only when the money is actually received. So in the same example, the sale wouldn't be recorded until the customer paid for it.
There are a few different pros and cons to each method. The accrual method provides a more accurate picture of a company's financial situation because it records all revenue, regardless of when it's actually received. This can be helpful in decision-making because it gives a fuller picture of the business's earning potential. However, it can also be more complicated to keep track of and can create issues with cash flow if revenue is recorded before it's actually received.
The cash method is simpler and can provide a more immediate picture of a company's finances, which can be helpful for business owners who need to make quick decisions. However, it can be less accurate because it doesn't take into account all revenue, only the revenue that's been received.
Ultimately, the best method for recording revenue depends on the individual business and what's most important for the owners and decision-makers.
