Which of the following best describes the revenue recognition principle?

• A. Revenues are recognized once cash is received
• B. Revenues are recognized when earned, regardless of cash receipt
• C. Revenues can be recognized at any point in time
• D. Revenues should always be realized before acknowledgment

Answer: (B)

The revenue recognition principle is best described by the understanding that revenues are recognized when they are earned, which typically occurs when goods are delivered or services are rendered, regardless of whether cash has been received at that time. This principle is a foundational aspect of accrual accounting and ensures that financial statements accurately reflect a company's performance during a specific period. By emphasizing the performance obligation rather than cash exchanges, this principle helps provide a clearer view of a company's financial health.

This approach aligns revenues with the expenses incurred to generate them, thus allowing for a better matching of income and expenses in the financial statements. By adhering to this principle, businesses can present a more accurate financial position, demonstrating their transaction activities rather than just cash flow.