If a company earns revenue on credit but does not yet collect cash, how does accrual vs cash basis affect when revenue is recognized?

• A. Under accrual, revenue is recognized when earned (even if cash not collected); under cash basis, revenue is recognized only when cash is received.
• B. Under accrual, revenue is recognized only when cash is received; under cash basis, revenue is recognized when earned.
• C. Both methods recognize revenue at the same time.
• D. Accrual recognizes revenue when cash is received; cash basis recognizes revenue when goods are delivered.

Answer: (A)

The timing of revenue recognition depends on the accounting basis used. Under accrual accounting, you recognize revenue when the performance obligation is satisfied and the revenue is earned, regardless of when cash is collected. If a sale is made on credit, you record revenue now and set up an accounts receivable, with cash collection happening later. Under cash basis accounting, revenue is recognized only when cash is actually received, so revenue earned on credit would not be recognized until the cash comes in. Therefore, the description that revenue is recognized when earned under accrual (even if cash isn’t collected) and recognized only when cash is received under cash basis is the correct understanding. The other descriptions misstate the timing for one or both methods.