Accounting Fundamentals Certification (AFC) Practice Test

Under accrual accounting, when is revenue recorded and reported?

1. When cash is received

2. When the service is rendered

3. At the end of the financial year

4. When the invoice is sent

The correct answer is: When the service is rendered

Under accrual accounting, revenue is recorded and reported when it is earned, which typically occurs when the service is rendered or the product is delivered, regardless of whether cash has been received at that moment. This principle is central to accrual accounting, which aims to match revenues with the expenses incurred to generate those revenues within the same accounting period. By recognizing revenue when it is earned rather than when cash is received, financial statements provide a more accurate picture of a company's financial performance and position. In this context, cash being received, the timing of sending an invoice, or merely concluding a financial year do not determine when revenue should be recognized under accrual accounting principles. Instead, the focus is on the completion of the service or delivery of the good, which signifies that the earning process is complete and the revenue can be justifiably recorded. This ensures that stakeholders can assess the company’s readiness and ability to generate income beyond just cash transactions.