CSLB Law & Business ExamBusiness FinancesMedium
A contractor uses the accrual method of accounting. On January 15th, the contractor completed a project and issued an invoice to the client for $10,000. The client paid the invoice on February 5th. In which month should the $10,000 revenue be recognized?
- AWhen the cash is received in February.
- BWhen the contract was signed, regardless of completion.
- CWhen the project is completed and invoiced in January.
- DSpread evenly across the project duration.
Show answer & explanationAnswer & explanation
Correct answer: C. When the project is completed and invoiced in January.
Under the accrual method of accounting, revenue is recognized when it is earned, regardless of when cash is received. In this case, the revenue was earned upon completion of the project and invoicing in January.
Why the other options are wrong
- A. This describes the cash method of accounting, not accrual.
- B. Revenue is not recognized merely by signing a contract; work must be performed.
- D. Spreading revenue is typically for long-term contracts under percentage-of-completion, but recognition still aligns with work performed.
Accrual Accounting - Revenue Recognition
A method of accounting where revenues are recognized when earned and expenses are recognized when incurred, regardless of when cash changes hands.
- Revenue is recognized when goods or services are delivered, not when cash is received.
- Expenses are matched to the revenues they help generate.
- Provides a more accurate picture of a company's financial performance over a period.
Memory trick: Accrual: Earned it? Record it! Cash: Got it? Record it!