Which statement about accrual accounting is true?

Which statement about accrual accounting is true?

• A. Revenues are recognized when cash is received and expenses when cash is paid.
• B. Revenues are recognized when earned and expenses when incurred, regardless of cash flow.
• C. Revenues are never recognized until cash is received.
• D. Revenues are recognized only when the entire project is completed.

Answer: (B)

Accrual accounting records revenues when they are earned and expenses when they are incurred, regardless of when cash is actually received or paid. This keeps the financial results tied to the activity that occurred in the period, not to the timing of cash flows. The idea is to match revenues with the costs incurred to generate them, giving a clearer picture of profitability for that period. For example, if you perform a service this month and bill the client later, you recognize the revenue this month. If you incur an expense now but pay for it next month, you recognize the expense now. The option that ties revenues to cash receipts is describing cash-basis accounting, not accrual. Similarly, saying revenues are never recognized until cash is received is cash-basis, and saying revenue is recognized only when a project is fully completed ignores the milestone or performance-based recognition allowed under accrual accounting.

Accrual accounting records revenues when they are earned and expenses when they are incurred, regardless of when cash is actually received or paid. This keeps the financial results tied to the activity that occurred in the period, not to the timing of cash flows. The idea is to match revenues with the costs incurred to generate them, giving a clearer picture of profitability for that period. For example, if you perform a service this month and bill the client later, you recognize the revenue this month. If you incur an expense now but pay for it next month, you recognize the expense now. The option that ties revenues to cash receipts is describing cash-basis accounting, not accrual. Similarly, saying revenues are never recognized until cash is received is cash-basis, and saying revenue is recognized only when a project is fully completed ignores the milestone or performance-based recognition allowed under accrual accounting.