Which of the following statements regarding the recognition of revenues and expenses is correct?

• A. Revenue is recognized only when cash is received, regardless of when it is earned.
• B. Expenses are recognized when revenue is received, regardless of when the expense is incurred.
• C. Expenses are recognized only when cash is paid, regardless of when the related revenue is earned.
• D. Revenue is recognized when it is earned and realizable, regardless of when cash is received.

Answer: (D)

Verified step by step guidance

1. Understand the concept of revenue recognition: Revenue is recognized when it is earned and realizable, meaning the company has performed the service or delivered the goods, and there is a reasonable certainty that payment will be received.
2. Understand the concept of expense recognition: Expenses are recognized when they are incurred, meaning when the company uses resources or services to generate revenue, regardless of when cash is paid.
3. Review the incorrect statements: The first statement is incorrect because revenue recognition is not dependent solely on cash receipt; it depends on earning and realizability. The second statement is incorrect because expenses are not recognized based on revenue receipt but when incurred. The third statement is incorrect because expenses are not recognized solely based on cash payment.
4. Identify the correct statement: Revenue is recognized when it is earned and realizable, regardless of when cash is received. This aligns with the accrual basis of accounting, which is the standard method used in financial accounting.
5. Apply the accrual basis principle: The accrual basis of accounting ensures that revenues and expenses are recognized in the period they occur, providing a more accurate representation of a company's financial position and performance.