Question

On August 1, a customer signs a service contract with a company. On August 10, the company performs the services. On September 5, the customer pays the company. When should the company recognize the revenue in its accounting records, according to the accrual method?

Answer 1

The company should recognize the revenue on August 10 when the services were performed, as per the accrual method of accounting, which states revenue is recorded when earned, not when payment is received.

Step-by-step explanation:

According to the accrual method of accounting, the company should recognize the revenue when the services are performed, which in this case is August 10. This approach aligns with the revenue recognition principle that revenue should be recognized in the accounting period in which it is earned, regardless of when the payment is received.

Since the company completed the services on August 10, that is when the performance obligation was satisfied, and thus, revenue should be recorded on that date.

In this case, the company performed the services on August 10, so this is when the revenue is considered to be earned. The payment made by the customer on September 5 is irrelevant for the recognition of revenue.