What is a key characteristic of accrual accounting?

What is a key characteristic of accrual accounting?

• A. Revenue is recognized when earned and expenses when incurred
• B. Revenue recognized only when cash is received
• C. All items recognized at year-end
• D. Only cash flows are recorded

Answer: (A)

In accrual accounting, revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of when cash is actually received or paid. This follows the idea that you should match revenues with the costs used to generate them in the same period, giving a true sense of profitability. For example, if you perform a service this month and bill later, you record the revenue now as accounts receivable. If you incur a cost this month but pay for it later, you record the expense in the same period you used the item or service. This differs from cash basis, which records revenue only when cash comes in and expenses only when cash goes out. The other statements aren’t characteristics of accrual accounting because they imply waiting for year-end recognition, focusing only on cash flows, or ignoring non-cash items like receivables and payables.

In accrual accounting, revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of when cash is actually received or paid. This follows the idea that you should match revenues with the costs used to generate them in the same period, giving a true sense of profitability. For example, if you perform a service this month and bill later, you record the revenue now as accounts receivable. If you incur a cost this month but pay for it later, you record the expense in the same period you used the item or service. This differs from cash basis, which records revenue only when cash comes in and expenses only when cash goes out. The other statements aren’t characteristics of accrual accounting because they imply waiting for year-end recognition, focusing only on cash flows, or ignoring non-cash items like receivables and payables.