The revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is performed.
For example, assume that Dave’s Dry Cleaning, Inc. cleans clothing on June 30 but customers do not claim and pay for their clothes until the first week of July. Under the revenue recognition principle, Dave’s earns revenue in June when it performed the service, rather than in July when it received the cash. At June 30, Dave’s would report a receivable on its balance sheet and revenue in its income statement for the service performed.