According to the revenue recognition principle, when should revenue be recognized?

The revenue recognition principle states that revenue should be recognized when it is earned, which generally means when the goods or services have been delivered to the customer, and the risks and rewards of ownership have transferred. This approach allows a business to record revenue at the point it has fulfilled its obligations to the customer, regardless of when the payment is actually received.

Recognizing revenue at the point of earning, rather than when cash is collected, provides a more accurate picture of a company's financial performance during a specific period. It aligns with the accrual basis of accounting, which emphasizes recognizing economic events regardless of cash transactions.

This principle helps maintain consistency and comparability in financial reporting, ensuring that stakeholders can evaluate the business's performance based on all activities, not just cash flow. This methodology is crucial for understanding profitability and operational efficiency, allowing businesses to make informed decisions that reflect their true financial status.