What is revenue recognition?

Revenue recognition refers to the accounting principle that dictates when revenue should be recorded in the financial statements. The correct answer highlights that revenue is recognized when it is earned, regardless of when the cash is actually received. This concept is key to providing an accurate representation of a company's financial performance and is grounded in the accrual basis of accounting.

Under this principle, revenue is typically recognized at the point when the service is performed or the product is delivered, aligning with the transfer of risks and rewards to the customer. This approach ensures that financial statements reflect the economic activity of a company in the period it occurs, contributing to a more accurate assessment of profitability and performance.

The other options focus on different aspects, such as cash basis accounting (which recognizes revenue only upon cash receipt) or deferring recognition until payment is received, neither of which adheres to the accrual accounting principles that govern revenue recognition. Categorizing revenue by type of product or service, while useful for analysis, does not define the timing of revenue recognition itself.