In accrual accounting, how does revenue recognition affect accounts receivable and cash receipts?

• A. Under accrual accounting, revenue recognized increases accounts receivable if not yet collected; cash is recorded when collected, affecting cash flow.
• B. Revenue recognition has no impact on cash flows.
• C. Revenue is recognized only when cash is received.
• D. Revenue recognition reduces accounts receivable.

Answer: (A)

Under accrual accounting, revenue is recognized when earned, not when cash is received. When revenue is recognized for a sale with no cash yet collected, accounts receivable increases because the company now has a claim for payment. Cash is not affected at that moment. Later, when the customer pays, cash increases and accounts receivable decreases, leaving revenue already recorded. This shows why revenue recognition and cash receipts can occur in different periods. The idea that revenue recognition has no impact on cash flows is incorrect because the timing of cash receipts is separate from when revenue is recognized. The notion that revenue is recognized only when cash is received reflects cash accounting, not accrual. And recognizing revenue does not reduce accounts receivable at the time of recognition; it increases it until the cash is collected.