Which statement best defines accrual accounting?

• A. Accrual accounting recognizes revenues when earned and expenses when incurred, regardless of cash flow.
• B. Accrual accounting recognizes revenues only when cash is received.
• C. Accrual accounting ignores expenses until paid.
• D. Accrual accounting is identical to cash basis in all cases.

Answer: (A)

Accrual accounting records business activity when it happens, not when cash moves. Revenue is recognized when earned, meaning the company has delivered goods or performed services and has a right to payment. Expenses are recognized when incurred, meaning the cost is tied to the revenue being generated in the same period, even if cash hasn’t been paid yet. This approach follows the revenue recognition principle and the matching principle, giving a clearer view of profitability for the period.

For example, a sale on credit is recorded as revenue now with a corresponding accounts receivable, and wages or utilities are recorded as expenses in the period they were incurred, even if payment occurs later.

The other statements don’t fit accrual accounting because one describes recognizing revenue only when cash is received (cash basis), one suggests expenses are ignored until paid (not accurate for accrual), and one claims accrual is identical to cash basis in all cases (they differ when cash flow timing doesn’t align with when revenue is earned or expenses are incurred).