Which principle recognizes income when it is earned and expenses when incurred?

Which principle recognizes income when it is earned and expenses when incurred?

• A. Cash Basis
• B. Accrual Principle
• C. Adequate Disclosure
• D. Consistency

Answer: (B)

Accrual basis of accounting recognizes income when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. This approach follows the matching principle, aiming to pair revenues with the costs that produced them in the same period to show true profitability. For example, if a service is performed in the current period but billed and paid later, the revenue is recorded now; similarly, an expense is recognized when the obligation arises, even if payment occurs later. This provides a clearer picture of performance than cash basis, which records revenues and expenses only when cash is received or paid. Note that adequate disclosure and consistency relate to providing sufficient information and applying the same methods consistently, not to the timing of revenue and expense recognition.

Accrual basis of accounting recognizes income when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. This approach follows the matching principle, aiming to pair revenues with the costs that produced them in the same period to show true profitability. For example, if a service is performed in the current period but billed and paid later, the revenue is recorded now; similarly, an expense is recognized when the obligation arises, even if payment occurs later. This provides a clearer picture of performance than cash basis, which records revenues and expenses only when cash is received or paid. Note that adequate disclosure and consistency relate to providing sufficient information and applying the same methods consistently, not to the timing of revenue and expense recognition.