Which statement best describes the accrual basis of accounting?

Which statement best describes the accrual basis of accounting?

• A. Records revenues when cash is received and expenses when cash is paid.
• B. Records revenues when earned and expenses when incurred.
• C. Records revenues when earned and expenses when paid.
• D. Records revenues at year-end only.

Answer: (C)

Accrual basis accounting records revenues when they are earned and expenses when they are incurred. This approach follows the matching principle: it matches the income from a sale with the expenses incurred to earn that income in the same reporting period, giving a more accurate picture of profitability regardless of cash movements. One description reflects cash timing for both revenues and expenses (recording when cash is received or paid), which is not accrual. Another describes revenue timing correctly but expense timing as paid, which doesn’t align with accruals. The option that suggests revenue timing only at year-end is not a complete or accurate approach. The phrasing that best describes accruals is recognizing revenues when earned and expenses when incurred.

Accrual basis accounting records revenues when they are earned and expenses when they are incurred. This approach follows the matching principle: it matches the income from a sale with the expenses incurred to earn that income in the same reporting period, giving a more accurate picture of profitability regardless of cash movements.

One description reflects cash timing for both revenues and expenses (recording when cash is received or paid), which is not accrual. Another describes revenue timing correctly but expense timing as paid, which doesn’t align with accruals. The option that suggests revenue timing only at year-end is not a complete or accurate approach. The phrasing that best describes accruals is recognizing revenues when earned and expenses when incurred.