Under the revenue recognition principle in basic accounting, revenue from providing a service should be recognised at which point in time?

Introduction / Context:
In financial accounting, one of the core principles is the revenue recognition principle. This principle guides when a business should record revenue in its books. Recognising revenue at the correct time ensures that financial statements show an accurate picture of performance and profitability. This question asks when revenue should be recognised under this principle and distinguishes between earning revenue and merely receiving cash or orders.

Given Data / Assumptions:

• The question concerns basic financial accounting under the accrual basis, not cash basis accounting.
• Under accrual accounting, revenue is recognised when it is earned, not necessarily when cash is received.
• The options describe different possible events: performing the service, charging an order, receiving cash, placing an order, and the end of the year.
• The business is assumed to have a reasonable expectation of collecting payment when it recognises revenue.

Concept / Approach:
The revenue recognition principle states that revenue should be recognised when it is earned and realisable. For service businesses, this typically means when the service is performed. For goods, it usually means when the goods are delivered and control passes to the customer. Recognising revenue only when cash is received would follow cash basis accounting, which is not suitable for most formal financial statements. Recording revenue when an order is merely placed is premature, because the business has not yet provided the service or delivered the goods. Therefore, revenue is recognised when performance obligations are substantially satisfied.

Step-by-Step Solution:
Step 1: Recall that under accrual accounting, revenue is recorded when it is earned, regardless of the timing of cash receipts.Step 2: Identify that for services, earning revenue occurs when the service is performed for the customer.Step 3: For goods, revenue is generally earned when the goods are delivered and the buyer assumes control and the risks and rewards of ownership.Step 4: Evaluate the options. The only option that clearly states recognition at the time of performance or delivery is option a.Step 5: Recognise that charging an order or placing an order does not itself create earned revenue because the service has not been fully delivered.Step 6: Note that waiting only for cash receipt ignores credit sales, which are common in business, and delaying recognition until the year end would distort interim performance measurement.

Verification / Alternative check:
Accounting standards and introductory texts explain that revenue is recognised when a performance obligation is satisfied and when collection is reasonably assured. Examples show that if a service is provided today on credit terms, revenue is recognised today, and an account receivable is recorded, even though cash may arrive later. Similarly, if a customer pays in advance, revenue is deferred until the service is actually performed, confirming that performance, not payment, is the critical moment for recognition.

Why Other Options Are Wrong:
Charging an order to a credit account records a promise to pay but does not itself guarantee that the service has been delivered; recognition before performance would be premature. Recognising revenue only when cash is received would fail to reflect credit sales accurately and is inconsistent with accrual accounting. Recording revenue when the customer places an order is clearly incorrect because no economic activity has yet occurred. Recognising revenue only at the end of the year regardless of performance would mix periods and distort the matching of revenues and expenses.

Common Pitfalls:
Many beginners confuse cash flow with revenue and believe that revenue is recognised only when cash enters the business. Others may think that signing a contract or placing an order is enough to book revenue, without understanding that the firm must first provide goods or services. To avoid these mistakes, remember the key phrase that under accrual accounting, revenue is recognised when it is earned and realisable, which usually coincides with performing the service or delivering the goods.

Final Answer:
Revenue should be recognised when the service has been performed or the goods have been delivered to the customer and the amount is reasonably collectible.