Which statement best describes when revenue is recognized under revenue recognition rules?

Which statement best describes when revenue is recognized under revenue recognition rules?

• A. When cash is collected from customers
• B. When goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services
• C. At the end of the reporting period
• D. When the contract is signed

Answer: (B)

Revenue is recognized when control of the goods or services transfers to the customer in exchange for the amount the entity expects to be entitled to receive. This reflects the timing of earning revenue: once the seller has satisfied its performance obligation and the customer can direct the use of and obtain the remaining benefits from the goods or services, revenue is recorded for the contract price. This focus on transfer of control and the transaction price explains why it’s not tied to cash collection, which can occur later or earlier than delivery; it’s not automatic at the end of a reporting period, since revenue depends on when performance obligations are satisfied; and it’s not triggered simply by signing the contract, because no transfer of goods or services has occurred yet.

Revenue is recognized when control of the goods or services transfers to the customer in exchange for the amount the entity expects to be entitled to receive. This reflects the timing of earning revenue: once the seller has satisfied its performance obligation and the customer can direct the use of and obtain the remaining benefits from the goods or services, revenue is recorded for the contract price.

This focus on transfer of control and the transaction price explains why it’s not tied to cash collection, which can occur later or earlier than delivery; it’s not automatic at the end of a reporting period, since revenue depends on when performance obligations are satisfied; and it’s not triggered simply by signing the contract, because no transfer of goods or services has occurred yet.