What should businesses avoid when recording revenue?

When recording revenue, businesses should avoid adding non-existing revenue because this practice can lead to significant inaccuracies in financial reporting and misrepresentation of the company's performance. Revenue should be recognized when it is earned and realizable, meaning there is a legitimate transaction that has occurred, such as the sale of goods or services. By including non-existent revenue, a business may inflates its earnings, which can mislead stakeholders and create a false sense of financial health.

Accurate revenue recognition is crucial for maintaining investor confidence, complying with accounting standards, and ensuring that the financial statements truly reflect the economic activities of the business. Misreporting revenue can also lead to serious legal repercussions and damage the company's reputation.

In contrast, the other choices involve practices that are typically less problematic for recognizing revenue. Excluding all expenses does not pertain directly to revenue recording itself but rather to the overall accounting practices. Underestimating liabilities can affect the company’s financial position but does not directly impact revenue recognition. Reporting only cash transactions, although conservative, still aligns with certain legitimate accounting principles, particularly for cash-based businesses, as it reflects the cash flow accurately during a period.