Define 'revenue recognition'.

Revenue recognition refers to the principle that dictates when revenue should be recognized in the financial statements. This principle is crucial in accounting as it ensures that revenue is recorded in the correct accounting period, reflecting the economic activity of the business accurately. Under the accrual basis of accounting, revenue is recognized when it is earned, regardless of when cash is received. This means that a company may recognize revenue at the point of sale or when the service is delivered, providing a clearer picture of income and financial performance to stakeholders. Understanding this principle is essential for compliance with accounting standards and provides a foundation for analyzing a company's financial health.