What is the revenue recognition principle?

• A. Revenue is recognized when earned and realizable, typically at the time services are performed or goods delivered.
• B. Revenue is recognized when cash is received.
• C. Revenue recognized when expenses are incurred.
• D. Revenue recognized at end of period.

Answer: (A)

Revenue is recognized when earned and realizable, typically at the time services are performed or goods delivered. This follows accrual accounting: revenue is recorded when the company has fulfilled its part of the bargain and it is reasonably certain that the customer will pay. The moment the goods are delivered or the service is completed, control passes to the customer (the performance obligation is satisfied), and revenue is recognized even if cash is received later. If payment is received before delivering the product or performing the service, that money is recorded as a liability (unearned revenue) until the obligation is satisfied.

So the correct idea is to match revenue to the completion of the seller’s performance and the likelihood of collection, not to the receipt of cash or to expenses.