Question

When do companies recognize revenue?

1) At the end of the fiscal year
2) When the product is delivered to the customer
3) When the customer places an order
4) When the company receives payment from the customer

Answer 1

Companies generally recognize revenue when they deliver the product to the customer, fulfilling their performance obligation. This moment of recognition is irrespective of the payment received.

Step-by-step explanation:

Companies recognize revenue when the goods or services are transferred to the customer and the company has fulfilled its performance obligation, which is typically when the product is delivered to the customer (option 2). This is known as the revenue recognition principle and it is a core tenet of accrual accounting. Revenue is recognized independently of when the payment is actually received. For example, if a product is delivered in February but paid for in March, the revenue is recognized in February.

Total Revenue is a critical concept in this context, representing the income a firm generates from selling its products and is calculated by Price multiplied by Quantity sold.