Final answer:
The revenue recognition principle states that revenue is recognized when it is realized or realizable and earned, aligning with the accrual accounting method. It ensures that the financial statements reflect the true financial performance of an organization by accounting for income in the period it is earned, not just when payment is received.
Step-by-step explanation:
The revenue recognition principle is a cornerstone of accrual accounting that dictates the specific conditions under which income is recognized. To clarify, revenue is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is recognized when it is both realized or realizable, and earned. This concept is fundamental in the field of accounting, ensuring that financial statements provide a faithful representation of an organization's financial performance.
The correct answer to the question, 'The revenue recognition principle provides that revenue is recognized when' is c. it is realized or realizable and it is earned. This implies that revenue should be recorded in the period in which it is earned and measurable, not merely when the cash is received. It aligns with the overall purpose of accruing revenue and matching revenue with the expenses in the period in which it was earned, to reflect the real financial position of a company or organization.
As an example, if a company delivers a service in December but doesn't receive payment until January, the revenue is to be recognized in December, which is when the service was rendered and therefore earned. This practice is especially important for the accurate reporting of financial results and for making informed decisions based on those results.