Auctioneer Practice Exam

At what point is revenue recognized according to the realization principle?

1. At the time cash is received

2. When goods or services are sold

3. At the end of the fiscal year

4. Only when customer payment is assured

The correct answer is: When goods or services are sold

The realization principle in accounting states that revenue should be recognized when goods or services have been delivered or performed, regardless of when cash is received. This means the point of sale is what triggers revenue recognition, as it reflects the completion of the earnings process. Thus, once the transaction is finalized and the buyer has taken possession of the goods or the service has been rendered, the revenue can be recorded. The other options do not align with the realization principle. Recognizing revenue at the time cash is received does not consider the completion of the transaction in terms of delivery or service provision. Similarly, recognizing revenue solely at the end of the fiscal year doesn't consider the actual earning of income throughout the year. Lastly, waiting until customer payment is assured could delay recognizing income even after the service or goods have been delivered, which does not adhere to the realization principle. Therefore, revenue is recognized when goods or services are sold, aligning perfectly with the realization concept.