Accrual accounting recognises incomes and expenses:

Question

BlackTom AI · Accepted Answer

Accrual accounting focuses on the timing of economic events rather than cash movements, so it recognizes incomes and expenses when they are earned or incurred, not when cash changes hands.
Option 1: 'When cash is received or paid.' This describes cash accounting, which records transactions only at the time cash flows occur, not when the earnings are generated or costs are incurred. Therefore this is not aligned with accrual principles.
Option 2: 'When they are earned or incurred, regardless of cash flow.' This aligns with accrual accounting, which records revenues when performance obligations are satisfied and expenses when they are incurred, independent of when cash is received or paid.
Option 3: 'Only at the end of the accounting period.' Delaying recognition to the end of the period ignores the timing of revenue and expense recognition within the period, which accrual accounting requires to reflect economic activity accurately.
Option 4: 'When the financial statements are prepared.' Recognizing incomes and expenses is not contingent on the act of preparing financial statements; it should occur during the period as the earnings and costs occur, matching the accrual concept.

Accrual accounting recognises incomes and expenses:Single choice

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