Define the revenue recognition principle and provide an example.

• A. Revenue is recognized when cash is received.
• B. Revenue is recognized when the company’s operating cycle begins.
• C. Revenue is recognized when goods are produced.
• D. Revenue is recognized when performance obligations are satisfied; example: delivering goods to a customer on credit.

Answer: (D)

Revenue recognition means recording revenue when the business has satisfied its performance obligation by transferring control of goods or services to the customer, not when cash changes hands. This aligns with accrual accounting: you earn revenue when the customer is able to benefit from the product or service, and the company has fulfilled its promise.

In the example, delivering goods to a customer on credit triggers revenue recognition at the moment of delivery. Even though cash hasn’t yet been received, you record revenue and an accounts receivable, because the customer now owns the goods and the earning process is complete. Cash collection occurs later, but it doesn’t affect the fact that revenue was earned when the goods were delivered.

Other options would tie revenue to cash received, when the operating cycle starts, or when goods are produced, none of which reflect the actual transfer of control or completion of the promised service.