Profits are recognised when goods are sold. What concept is this
Answer Details
The concept being described here is the realization principle, which is a fundamental accounting principle that governs the recognition of revenue in financial statements. This principle states that revenue should be recognized by a business when it has been earned, and the collection of the corresponding payment is reasonably assured.
In simpler terms, a business should only recognize revenue when it has completed the sale of goods or services to a customer and is confident that it will receive payment for those goods or services. This means that a business cannot recognize revenue before it has delivered the goods or services, nor can it recognize revenue for goods or services that have not yet been paid for.
Therefore, the realization principle ensures that financial statements reflect the true economic reality of the business by only recognizing revenue when it has been earned and is reasonably assured.