What does "revenue recognition" mean?

Revenue recognition refers to the accounting principle that determines the specific conditions under which income becomes realized as revenue. The correct choice highlights that revenue should be recorded when it is earned and realizable. This means that revenue is recognized when a company has delivered its goods or services and has the right to receive payment for them, irrespective of when the actual cash is received.

This approach is consistent with the accrual basis of accounting, where transactions are recorded in the financial statements when they occur, not necessarily when cash exchanges hands. This principle ensures that financial statements provide a more accurate picture of a company's financial position at any given time by matching revenue with the expenses incurred to generate that revenue.

In contrast, other options suggest inaccuracies in the timing of revenue recognition. Automatically recognizing all revenue, reporting total cash receipts, or recognizing revenue only when cash is received does not align with the generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). These principles emphasize the importance of recognizing revenue based on performance obligations being fulfilled rather than on cash transactions alone. Thus, the focus on earning and realizability encapsulated in the correct answer provides clarity on the revenue recognition process, ensuring that a company's financial performance is accurately represented.