Final answer:
Revenue is recognized in accordance with the revenue recognition principle when it is both realized or realizable and earned, reflecting the completion of the earnings process and a reasonable certainty of payment.
Step-by-step explanation:
The revenue recognition principle is a cornerstone of accrual accounting. It dictates that revenue should be recognized when it is earned and measurable, not necessarily when cash is received. This principle ensures that financial statements provide a consistent and accurate depiction of a company's financial performance within a period. In practice, revenue is recognized when it is both realized or realizable, and earned — which is to say, when the company has substantially completed what it must do to be entitled to the payment, and the payment is either received or is certain to be received in the future.
For example, a company selling furniture may recognize revenue when it delivers the furniture to the customer, not when the customer actually pays, if the payment is assured.
According to this principle, the correct answer to the student's question is that revenue is recognized when it is realized or realizable and earned. This means that services have been rendered or goods have been delivered, and there is reasonable assurance of payment. The recognition aligns with the goal of representing a company's true earnings during a specific accounting period.