Business Degree Certification Practice Test

In financial accounting, which principle justifies recognizing revenue at the point of sale?

1. Matching principle

2. Revenue recognition principle

3. Accrual principle

4. Cost principle

The correct answer is: Revenue recognition principle

The principle that justifies recognizing revenue at the point of sale is the revenue recognition principle. This principle states that revenue should be recognized when it is earned and realizable, typically at the moment a transaction is completed — that is, when goods or services have been delivered to the customer, and the payment is assured. In practical terms, this means that businesses recognize revenue when they have fulfilled their obligation to the buyer, thus reflecting the transactional reality in the financial statements. This principle is crucial as it ensures that income is recorded in the correct accounting period, providing a clearer picture of the company's performance for that period. The matching principle focuses on aligning revenues with the expenses incurred to generate those revenues, rather than the timing of revenue recognition itself. Meanwhile, the accrual principle relates to recording revenues and expenses when they are incurred, irrespective of cash movements, while the cost principle emphasizes recording assets at their original cost. While these principles play important roles in the overall accounting process, they do not specifically address the timing of revenue recognition like the revenue recognition principle does.