- A. matching
- B. consistency
- C. realization ✓
- D. going concern
Revenue recognition is a fundamental accounting principle that determines the specific conditions under which revenue is recognized or accounted for in financial statements.
Revenue recognition is crucial because it impacts a company’s financial performance and position. The principle of realization dictates that revenue should be recognized when it is earned, regardless of when the cash is received. This means that revenue should be recorded in the accounting records at the time goods are sold or services are rendered, even if payment has not yet been received.
In other words, Realization refers to the accounting principle that revenue should be recognized when it is earned, regardless of when cash is received. This principle is crucial in determining the financial performance of a company and ensuring accurate reporting of its revenues. The realization concept dictates that revenue should be recognized at the point when goods or services are delivered to customers and the sale is considered complete.
In contrast to realization, the other options provided are:
- Matching: The matching principle states that expenses should be matched with revenues in the period they are incurred. It ensures that a company’s income statement accurately reflects its profitability by matching expenses to the revenues they helped generate.
- Consistency: The consistency principle requires companies to use the same accounting methods and principles from one period to another. This ensures comparability between financial statements of different periods.
- Going concern: The going concern assumption assumes that a company will continue to operate in the foreseeable future without the need to liquidate its assets or cease operations. It underpins financial statement preparation by assuming continuity of business operations.
Therefore, among the options provided, the concept that aligns with recognizing revenue at the point of sale is realization.
