According to the revenue recognition principle, when should revenue be recorded?

• A. When it is earned and realizable, regardless of when cash is received
• B. Only when cash is received from the customer
• C. At the end of the fiscal year, regardless of when the sale occurred
• D. When the company places an order with a supplier

Answer: (A)

Verified step by step guidance

1. Understand the revenue recognition principle: This principle states that revenue should be recognized when it is earned and realizable, not necessarily when cash is received. This ensures that financial statements accurately reflect the company's performance during a specific period.
2. Analyze the options provided: Review each option carefully to determine which aligns with the revenue recognition principle. For example, recognizing revenue only when cash is received does not align with the principle, as revenue can be earned before cash is collected.
3. Focus on the concept of 'earned and realizable': Revenue is considered earned when the company has delivered goods or services to the customer, and realizable when payment is reasonably assured. This is the key criterion for recognizing revenue.
4. Eliminate incorrect options: For example, recognizing revenue at the end of the fiscal year regardless of when the sale occurred violates the principle, as it ignores the timing of earning the revenue. Similarly, placing an order with a supplier is unrelated to revenue recognition.
5. Select the correct answer: Based on the revenue recognition principle, revenue should be recorded when it is earned and realizable, regardless of when cash is received. This ensures compliance with accounting standards and accurate financial reporting.