Recognition definition
/What is Recognition in Accounting?
Recognition is the recordation of a business transaction in an entity's accounting records. Here are several examples of recognition:
Recognition of a loss. A loss is recognized on a lower of cost or market analysis, thereby recording the loss in the accounting records.
Recognition of a sale. A sale transaction is recognized by recording revenue in the accounting records.
Recognition of an expense. An invoice received from a supplier is recorded as an expense in the accounting records.
Example of Recognition in Accounting
As an example of the recognition of a loss, a retail company, holds $100,000 worth of inventory at the end of the year. However, due to changes in market demand, a significant portion of this inventory has become obsolete and cannot be sold at its original cost. After assessing the situation, the company determines that the fair market value of the inventory is now only $60,000. Therefore, the company needs to recognize a loss of $40,000 in its financial statements.