Under accrual accounting, when is revenue recognized?

• A. When cash is received
• B. When expenses are paid
• C. When performance obligation is satisfied
• D. At year-end

Answer: (C)

Revenue is recognized when the company satisfies its performance obligation and transfers control of the promised goods or services to the customer. This is the essence of accrual accounting: recording revenue when the earning process is complete, not necessarily when cash is received. Because of this, you can have a receivable if cash hasn’t arrived yet, or you may receive payment before you’ve delivered the goods or services and record unearned revenue (a liability) until the performance obligation is fulfilled. An example helps: a service contract paid upfront would recognize revenue over the period the service is provided, not all at once when the cash is received.

Recognizing revenue only when cash is received would be cash-basis accounting, which isn’t how accrual accounting works. Recognizing revenue when expenses are paid mixes up revenue with expenses, which are separate statements. Waiting until the end of the year is just a timing choice, not the criterion for revenue recognition.