What does the "revenue recognition principle" dictate?

What does the "revenue recognition principle" dictate?

• A. Revenue is recognized when cash is received
• B. Revenue should be recognized at year-end
• C. Revenue should be recognized when it is earned
• D. Revenue must be recognized after expenses

Answer: (C)

The revenue recognition principle dictates that revenue should be recognized when it is earned, regardless of when cash is received. This means that a company recognizes revenue when it has provided goods or services to the customer, and there is a reasonable expectation that payment will be received. This principle is a fundamental concept in accrual accounting, which focuses on recording financial transactions when they occur rather than when cash changes hands. By following this principle, financial statements present a more accurate picture of a company’s financial performance and position during specific accounting periods. It ensures that revenue is matched with the expenses incurred to earn that revenue, aligning with the matching principle in accounting.

The revenue recognition principle dictates that revenue should be recognized when it is earned, regardless of when cash is received. This means that a company recognizes revenue when it has provided goods or services to the customer, and there is a reasonable expectation that payment will be received. This principle is a fundamental concept in accrual accounting, which focuses on recording financial transactions when they occur rather than when cash changes hands. By following this principle, financial statements present a more accurate picture of a company’s financial performance and position during specific accounting periods. It ensures that revenue is matched with the expenses incurred to earn that revenue, aligning with the matching principle in accounting.