What is the meaning of “realization” in accounting?

Realization is an important principle in accounting. It is the basis of revenue recognition and it gives to accrual accounting. When we used the word realization, it is usually regarding revenue recognition.

Realization of revenue means when revenue to be earned from the sale of goods or rendering of services or any other activity or source becomes absolute and certain. An item is to be shown as revenue in the books of accounts only after it is realized.

Realization in case of sale of goods

Realization occurs in the following situations:

i) When the goods are delivered to the customer for a certain price

ii) All significant risks and rewards of ownership have been transferred to the customer and the seller retains no effective control over the goods.

Let’s take an example. Mr Peter received an order of 500 units of goods from Mr Parker on 1^st April. The goods were delivered to Mr Parker on 15^Th April and payment for goods was received on 30^Th April.

The realization of revenue from the sale of goods will be considered to have occurred on 15^th April because the goods were delivered to the customer on that date. The entry of sale of goods will be entered on this day.

Realization is not considered to have occurred on 1st April i.e the date of order because the seller had effective control on goods on that date.

Realization in case of rendering of services

The realization of revenue from the rendering of services occurs as per the performance of service.

Now there arise two situations:

• Multiple acts involved in the performance of service: Here, the revenue is realized proportionately on completion of each act.
• A Single act involved in the performance of service: Here, revenue is realized only when the service is completely rendered or provided.

Realization of income from other sources:

• Interest Income: It is realized on a time proportion basis as per the amount outstanding and rates applicable.
• Dividends: It is realized when the shareholder’s right to receive is established and when it is declared.

Realization with regards to other sources of income is considered to have occurred only when there exist no significant uncertainty as to measurability or collectability.