According to the Revenue Recognition Principle, when should a business recognize its revenue?

According to the Revenue Recognition Principle, when should a business recognize its revenue?

• A. When payment is received from a customer.
• B. When it is earned.
• C. Whenever the reporting period ends.
• D. When the invoice is issued.

Answer: (B)

Revenue is recognized when it is earned, meaning the company has fulfilled its part of the deal by delivering goods or performing the service and the revenue is realizable. This follows accrual accounting, so the timing of cash collection or invoicing doesn’t control when revenue is recorded. For example, if you ship merchandise in one month but get paid in the next, the revenue is recorded when the goods are delivered, not when the cash arrives. Recognizing revenue only at payment or when an invoice is issued ignores when the earning activity actually occurred.

Revenue is recognized when it is earned, meaning the company has fulfilled its part of the deal by delivering goods or performing the service and the revenue is realizable. This follows accrual accounting, so the timing of cash collection or invoicing doesn’t control when revenue is recorded. For example, if you ship merchandise in one month but get paid in the next, the revenue is recorded when the goods are delivered, not when the cash arrives. Recognizing revenue only at payment or when an invoice is issued ignores when the earning activity actually occurred.