Question

During May, Robinson Corporation billed a customer $3,000 for services performed during May. During June, Robinson Corporation collected the $3,000. Which of the following statements about this transaction is correct?

a. $1,500 of revenue should be recorded in May and $1,500 in June
b. No revenue should be recorded for these events because they relate only to the balance sheet
c. $3,000 in revenues should be recorded in June
d. $3,000 of revenue should be recorded in May

Answer 1

Revenue should be recorded when earned, not when payment is received, according to accrual accounting's revenue recognition principle. Robinson Corporation should record $3,000 of revenue in May for services performed that month.

Step-by-step explanation:

The transaction described pertains to when revenue should be recognized by Robinson Corporation. According to the revenue recognition principle in accrual accounting, revenue should be recorded when it is earned, regardless of when the payment is actually received.

In this case, since Robinson Corporation billed a customer for services performed during May, it means the services were completed at that time, and thus, the revenue should be recorded in May. This principle ensures that financial statements present a company's financial performance accurately for a specific period.

Applying this concept to the self-check question example, if a firm reports sales revenue of $1 million last year, and had expenses totaling $950,000 ($600,000 on labor, $150,000 on capital, and $200,000 on materials), its accounting profit would be calculated by subtracting the explicit costs from the total revenues, resulting in a profit of $50,000.