Which statement regarding the revenue recognition principle is true?

• A. Revenue is recognized only when cash is received from customers.
• B. Revenue is recognized when expenses are paid.
• C. Revenue is recognized at the end of the fiscal year, regardless of when goods or services are delivered.
• D. Revenue is recognized when it is earned, regardless of when cash is received.

Answer: (D)

Verified step by step guidance

1. Understand the revenue recognition principle: This principle states that revenue should be recognized when it is earned, not necessarily when cash is received. This means that revenue is recorded when goods or services are delivered to the customer, and the company has fulfilled its performance obligations.
2. Analyze the incorrect options: The first option, 'Revenue is recognized only when cash is received from customers,' is incorrect because revenue recognition is not dependent on cash receipt but on earning the revenue. The second option, 'Revenue is recognized when expenses are paid,' is incorrect because revenue recognition is unrelated to expense payment. The third option, 'Revenue is recognized at the end of the fiscal year, regardless of when goods or services are delivered,' is incorrect because revenue must be recognized when earned, not based on the fiscal year-end.
3. Identify the correct statement: The correct statement is 'Revenue is recognized when it is earned, regardless of when cash is received.' This aligns with the revenue recognition principle, which emphasizes earning revenue as the key criterion for recognition.
4. Relate the principle to accounting standards: The revenue recognition principle is a fundamental concept in accrual accounting and is supported by accounting standards such as the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). These standards ensure that financial statements accurately reflect the timing of revenue generation.
5. Apply the principle in practice: In real-world scenarios, companies often recognize revenue when they deliver goods or services, even if payment is received later. For example, if a company delivers a product to a customer in December but receives payment in January, the revenue is recognized in December because that is when it was earned.