AICPA Practice Exam 2025 – Complete Preparation Resource

Revenues are recognized when they are earned under the accrual basis of accounting. This method adheres to the revenue recognition principle, which states that revenue should be recorded in the period in which it is earned, regardless of when the cash is received. This approach allows for a more accurate representation of a company's financial performance, as it reflects all income generated from sales and services provided in the correct accounting periods.

In contrast, cash basis accounting recognizes revenues only when cash is received, which can lead to a distortion of financial performance by not accounting for sales made on credit. Modified cash basis accounting is a hybrid approach that incorporates elements of both cash and accrual accounting, but it still primarily focuses on cash transactions. Fund accounting is typically used by non-profit organizations and governmental entities, focusing on the accountability of funds rather than the recognition of revenues in the traditional sense.