Most companies, including small businesses, keep records of their recognized, or earned, revenue for each accounting period. The company may use this revenue to attract potential investors, obtain financing and prepare financial statements for shareholders. According to generally accepted accounting principles, companies can recognize their revenue only if it is realized or realizable. The difference between these two types of revenue is subtle.
The term "revenue" refers to all money a company earns. Realized revenue is revenue that the company already has received. Realizable revenue, on the other hand, is revenue that the company hasn't received yet but expects to receive in the future. Revenue becomes receivable when a customer makes an official agreement with the company to pay for a service or product.
Companies may receive realized revenue at the time of the service or sale. For example, a company that sells retail office supplies receives realized revenue each time a customer pays for items at the checkout counter. Companies that earn realizable revenue usually receive it when a customer signs a contract or verbally agrees to pay a bill for a service or sale. For example, a company that provides heating and air services may sign a contract with a customer allowing him to pay for his services 30 days after they are rendered. In this case, the company has earned realizable revenue.
Most companies include both realized and realizable revenue on their income statements. However, companies that primarily earn realized revenue can be more certain about the amount of money they have earned during an accounting period than companies that primarily earn realizable revenue. Though the company intends to receive its realizable revenue, some customers may refuse to pay or discharge the debt in bankruptcy.
After the company receives the money it expects from realizable revenue, the money becomes realized revenue. For example, when a customer signs a contract to pay for an order he receives within 60 days, the company has earned realizable revenue. After the customer pays his bill, however, the company's realizable revenue becomes realized revenue. If a customer never pays his bill, then the company's realizable revenue becomes a bad debt that the company usually will deduct on its income taxes.