What criteria determine when revenue should be recognized under accrual accounting?

• A. Revenue is recognized when cash is received.
• B. Revenue is recognized only when goods are delivered.
• C. Revenue is recognized when it is realized or realizable and earned, typically at the point of sale or service completion, and when collectibility is reasonably assured.
• D. Revenue is recognized when expenses are recorded.

Answer: (C)

Revenue recognition in accrual accounting hinges on when revenue is earned and realizable, with collection being reasonably assured. This means you record revenue when the seller has substantially fulfilled its performance obligation and the amount to be collected is unlikely to fail, rather than waiting for cash to flow in. In practice, revenue is typically recognized at the point the sale is made or the service is completed, not when cash is actually received. If payment is received before the performance obligation is satisfied, you would record it as unearned revenue—a liability—until the goods or services are delivered.

This approach aligns revenue with the actual transfer of control and the earning process, not with timing of cash receipts. Tying revenue to cash receipts would be cash-basis accounting, which ignores the performance and the collectibility aspect. Recognizing revenue only upon delivery is too narrow because some revenues are earned even as services are performed or as long-term contracts progress. Finally, recognizing revenue when expenses are recorded would mix up two different financial events and does not reflect when value is created. The best criterion is the one that matches revenue to the earning and realizable concepts while ensuring collectibility is reasonably assured.