What does the "revenue recognition principle" dictate?

The revenue recognition principle dictates that revenue should be recognized when it is earned, regardless of when cash is received. This means that a company recognizes revenue when it has provided goods or services to the customer, and there is a reasonable expectation that payment will be received. This principle is a fundamental concept in accrual accounting, which focuses on recording financial transactions when they occur rather than when cash changes hands. By following this principle, financial statements present a more accurate picture of a company’s financial performance and position during specific accounting periods. It ensures that revenue is matched with the expenses incurred to earn that revenue, aligning with the matching principle in accounting.