Federal Nursing Home Administrator Practice Exam

In accrual accounting, when are revenues recognized?

1. When cash is received

2. When service is rendered or goods are delivered

3. At the end of the fiscal year

4. Only once the payment is received

The correct answer is: When service is rendered or goods are delivered

In accrual accounting, revenues are recognized when they are earned, which is typically when services are rendered or goods are delivered to the customer. This approach aligns with the revenue recognition principle, which focuses on the timing of when a transaction occurs rather than when cash is actually received. Under this method, even if payment has not yet been received, the revenue is recorded at the moment the service is successfully provided or the good is transferred, reflecting a more accurate picture of a business's financial position during a given period. This principle ensures that financial statements provide a complete and truthful representation of a company’s performance over time, allowing stakeholders to make informed decisions based on the revenue earned during the accounting period. In contrast, other methods like cash accounting recognize revenue only when cash is received, which can lead to discrepancies in the reporting of income and does not match revenue to the expenses incurred to generate it during that period.