What is the meaning of realization in finance?

Question

The definition of "realization" is well defined by multiple sources in accounting terms while we google it. But, can someone explain in terms of real life example that suits the meaning of realization?

Answer 1

The realization principle is the concept that revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned. 

Examples of that would be when company A delivers merchandise to B (FOB Destination). Once the goods have been received by B, revenue is realized because the underlying goods and services have been delivered/completed/fullfilled.

Another example could be a contract based service for a company. Until the contract has been delivered/completed/fulfilled, revenue cannot be realized.

You will also hear the term realization often with securities and currency. If company A purchased stock in company B at $10 and the next day it went to $15, company A has an "unrealized holding gain". Company A has a gain on the stock (of $5) but it is considered unrealized until the stock is sold (transaction completed). Once company A sells the stock they will realize the gain of $5. The completion of the transaction must occur for revenue/gains/expenses/losses to be realized.

I hope this helps...feel free to message if you need clarification or any other accounting help!

Best,

Evan