Final answer:
A business should record revenue under the revenue recognition principle when it delivers goods or services to a customer. Revenue is critical for a company's financial health as it determines its ability to borrow and impacts profit calculations.
Step-by-step explanation:
Under the revenue recognition principle, a business records revenue when it delivers goods or services to a customer, not merely when it prepares an invoice, receives payment, or gets an order. Revenue is defined as the income that a company generates from selling its products or services. Calculating total revenue involves multiplying the price of a product by the quantity sold (Total Revenue = Price x Quantity). Recognition of revenue at the point of delivery ensures that the revenue reported in the financial statements corresponds with the actual provision of services or transfer of goods, giving an accurate financial picture of the company. This principle is central to accrual accounting and allows businesses to better match their income with the expenses related to generating that income, which results in a clearer assessment of economic performance for a given period.
Moreover, a firm's ability to record significant revenues and profits is fundamental to its capability to borrow money, whether through banks or by issuing bonds. Taxes also play a crucial role in a government's revenue system and have various effects on consumer behavior and economic activities. Ultimately, a business seeks to earn a profit, which is calculated as Total Revenue minus Total Cost.