When should revenue be recognized according to the revenue recognition principle?

Revenue should be recognized when it is earned and realizable according to the revenue recognition principle. This principle is part of the accrual accounting method, which aims to ensure that financial statements reflect the economic reality of a company's operations rather than just cash transactions.

When revenue is considered earned, it indicates that the company has completed its part of the transaction, which could involve delivering goods or providing services. Recognizing revenue at this point aligns with the matching principle in accounting, which states that revenues should be matched with the expenses incurred in earning them within the same period.

The term "realizable" means that the amount of revenue can be collected. It implies that there is a reasonable assurance of payment, ensuring that the company does not recognize revenue that may not ultimately be collected.

Recognizing revenue strictly when cash is received (as in one of the other choices) would prevent the portrayal of an accurate financial position, as it does not account for sales made on credit or other arrangements in which revenue is legally recognized before cash exchanges hands. Similarly, recognizing revenue only when products are shipped or invoices are issued would not capture the complete essence of revenue recognition under generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS), which emphasize the completion of performance