Recognition of Revenue

E

Revenues are only recognized when they have been earned. Simply exchanging assets or liabilities does not result in revenue recognition.

The correct answer to the question is E. the revenue is realized and earned.

To understand this concept, let's break down the options and explain each one:

A. The entity has substantially accomplished what it is agreed to do. This option refers to the concept of "percentage of completion." In some cases, revenue can be recognized over time as the entity fulfills its obligations under a contract. However, this option does not capture the full criteria for revenue recognition.

B. The revenue is realizable. Realizable revenue refers to the ability to collect the revenue in cash or other assets. While the collectability of revenue is an important consideration, it is not the sole determinant for revenue recognition. Therefore, this option is not sufficient for recognizing revenue.

C. None of these answers. This option indicates that none of the provided answers are correct, but in this case, there is indeed a correct answer, so this option is not applicable.

D. Products or services are exchanged for cash or claims to cash. This option refers to the concept of "cash basis accounting." While this approach is simple, it does not comply with generally accepted accounting principles (GAAP). Revenue recognition should not be limited to cash exchanges only, as there are many instances where revenue is recognized even when cash has not been received.

E. The revenue is realized and earned. This is the correct option. Revenue is recognized when it is both realized and earned. Let's explain these two terms:

• Revenue is realized when a company has substantially completed the earnings process or transferred goods or services to the customer. In other words, it means that the company has delivered the promised goods or services.

• Revenue is earned when the company has performed its obligations under the contract, and there is reasonable assurance of collectability. This means that the company has fulfilled its performance obligations, and the customer is obligated to pay for the delivered goods or services.

Both realization and earning criteria must be met for revenue to be recognized. Realization focuses on the delivery aspect, while earning focuses on the completion of the company's obligations. Only when both criteria are satisfied can revenue be recognized.

Therefore, option E is the most accurate and comprehensive answer among the choices provided.