What is the Difference Between Realized and Recognized Income?

The difference between realized and recognized income lies in the timing of when the income is recorded and when it is received.

• Realized Income: This is the income that is earned, and it is recorded once the cash is received. In other words, the income is recognized only after the cash is received. Companies using the cash method of accounting rely on realized income when determining their financial performance.
• Recognized Income: This is the income that is recorded as soon as a business transaction is completed, irrespective of whether the cash has been received or not. Larger companies often opt for the accrual method of accounting, which recognizes income as soon as a transaction takes place.

The key difference between realized and recognized income is the involvement of cash receipt. Realized income is recorded only after the cash is received, while recognized income is recorded as soon as the transaction is committed, regardless of whether cash has been received. The accounting method a company uses will determine whether it relies more heavily on realized or recognized income.

Comparative Table: Realized vs Recognized Income

The difference between realized and recognized income can be summarized as follows:

Realized income is earned income when the company receives cash or its equivalent for goods or services provided. The cash method of accounting is primarily used by small businesses, as it is a simplified method where income is recognized only when received, and expenses are deducted only when paid.

Recognized income, on the other hand, is recorded when the financial transaction occurs. This method is often used by larger companies that opt for the accrual method of accounting. Under the accrual method, income is recorded when generated, and expenses are deducted when incurred, regardless of when the cash is received or paid.