CSLB Law & Business ExamBusiness FinancesMedium
A contractor uses the accrual method of accounting. On October 15th, the contractor completes a remodeling project for a client and issues an invoice for $12,000. The client pays the invoice on November 5th. In which month should the contractor recognize the revenue for this project?
- AOctober
- BDecember
- CSeptember
- DNovember
Show answer & explanationAnswer & explanation
Correct answer: A. October
Under the accrual method, revenue is recognized when it is earned, regardless of when the cash is received. Since the project was completed and the invoice issued in October, the revenue is recognized in October.
Why the other options are wrong
- B. The project was completed well before December.
- C. The project was not completed in September.
- D. This would be the revenue recognition month under the cash basis of accounting, not accrual.
Accrual Accounting - Revenue Recognition
Under the accrual method of accounting, revenue is recognized when it is earned, meaning when goods or services have been delivered or performed, regardless of when cash is actually received.
- Revenue recognized when earned, not when cash received
- Matches revenues with related expenses
- Required for most businesses by GAAP
Memory trick: Accrual: When the 'work is Done,' the revenue is 'Won,' not when the money's run.