Under the revenue recognition principle, when is revenue recognized for service and product sales?

• A. Revenue is recognized when performance obligation is satisfied, typically when control passes to the customer, not when cash is received.
• B. Revenue is recognized only when cash is received.
• C. Revenue is recognized when the product is ordered.
• D. Revenue is recognized at the end of the year.

Answer: (A)

Revenue is recognized when the seller satisfies a performance obligation by transferring control of goods or services to the customer, not when cash is received. For services, that means revenue is recorded as the service is performed and the customer gains control and benefits, which can occur over time or at the completion of the service depending on the contract. For products, revenue is recognized at the point in time when the customer gains control—typically at delivery or when risks and rewards pass to the customer.

Cash timing can differ from revenue recognition. If cash is collected before delivery, the amount is recorded as a liability (deferred revenue) until the performance obligation is satisfied. If cash is received after delivery, revenue has already been recognized when control passed.