How should revenue be recognized under GAAP?

• A. When cash is received
• B. When it is earned and realizable
• C. Based on customer expectations
• D. At the end of the fiscal year only

Answer: (B)

Revenue should be recognized under GAAP when it is earned and realizable, aligning with the revenue recognition principle. This principle dictates that revenue is recognized when the earnings process is complete, and there is reasonable certainty regarding its collectability. This typically occurs when goods or services have been delivered to the customer, and the risks and rewards of ownership have transferred to them.

This approach ensures that financial statements reflect the true economic activity of a business in the period in which the sales activity occurs, rather than simply when cash exchanges hands. Recognizing revenue based on cash received would not accurately reflect a company's performance if sales have been made on credit, as it could create a misleading picture of cash flow and profitability. Similarly, tying revenue recognition solely to customer expectations or limiting it to the end of the fiscal year would not adhere to the matching principle and could distort financial results. Thus, the criterion of being "earned and realizable" is essential for fair and accurate financial reporting under GAAP.