When is revenue recognized according to the revenue recognition principle?

The revenue recognition principle specifies that revenue should be recognized when it is earned, rather than solely when cash is received. This means that a company records revenue when it has completed a significant activity that generates income, regardless of when the payment is actually made.

For example, if a business delivers goods or provides services, it recognizes revenue at that point, even if the customer has not yet paid. This approach aligns with the accrual accounting method, which provides a more accurate reflection of a company's financial performance during a specific period. It ensures that revenue is matched with the expenses incurred to generate that revenue, leading to a clearer picture of profitability.

This principle is central to financial reporting as it helps maintain consistency and comparability across financial statements, allowing investors and stakeholders to more effectively assess a company’s performance over time.