What does GAAP require regarding revenue recognition?

What does GAAP require regarding revenue recognition?

• A. Revenue must be recorded when cash is received
• B. Revenue must be recorded when earned, regardless of cash flow
• C. Revenue must be reported only at the year's end
• D. Revenue should be estimated based on projections

Answer: (B)

The requirement for revenue recognition under Generally Accepted Accounting Principles (GAAP) is that revenue must be recorded when it is earned, regardless of when cash is received. This principle is grounded in the accrual basis of accounting, which emphasizes the matching of revenues with the expenses incurred in generating those revenues. When revenue is recognized as earned, it typically involves the completion of certain deliverables or services to the customer, thereby establishing the right to collect payment. This means that the focus is on the completion of the transaction rather than solely on the exchange of cash. For example, a company might provide goods or services and, depending on its accounting policy, recognize the revenue at the point of delivery or as specific milestones are achieved. This methodology allows for a more accurate representation of a company's financial performance, as it captures economic events as they occur rather than when payment is made. Recognizing revenue based on actual performance aligns with the underlying economic reality and provides stakeholders with a clearer view of the company's operations over a given period, enhancing comparability and consistency in financial reporting. In contrast, recording revenue only when cash is received can misrepresent the financial health of a business, as it may create significant lag in revenue that has already been earned but not yet collected. This approach

The requirement for revenue recognition under Generally Accepted Accounting Principles (GAAP) is that revenue must be recorded when it is earned, regardless of when cash is received. This principle is grounded in the accrual basis of accounting, which emphasizes the matching of revenues with the expenses incurred in generating those revenues.

When revenue is recognized as earned, it typically involves the completion of certain deliverables or services to the customer, thereby establishing the right to collect payment. This means that the focus is on the completion of the transaction rather than solely on the exchange of cash. For example, a company might provide goods or services and, depending on its accounting policy, recognize the revenue at the point of delivery or as specific milestones are achieved.

This methodology allows for a more accurate representation of a company's financial performance, as it captures economic events as they occur rather than when payment is made. Recognizing revenue based on actual performance aligns with the underlying economic reality and provides stakeholders with a clearer view of the company's operations over a given period, enhancing comparability and consistency in financial reporting.

In contrast, recording revenue only when cash is received can misrepresent the financial health of a business, as it may create significant lag in revenue that has already been earned but not yet collected. This approach