When are revenue and expenses recognized in accrual accounting?

When are revenue and expenses recognized in accrual accounting?

• A. When cash is received and paid.
• B. When earned and when incurred.
• C. When the budget is approved.
• D. When the transaction is posted.

Answer: (B)

Under accrual accounting, revenues are recognized when earned and expenses are recognized when incurred. This means you record revenue when you’ve substantially completed the earning process and the amount is collectible, not when cash actually comes in. Similarly, you record an expense when the economic event occurs—when the resource is consumed or the obligation is incurred—so that costs are matched with the revenues they help generate in the same period. This approach aligns financial results with the business activities that occur, regardless of when cash moves. The other timing options reflect cash basis or administrative actions rather than when the underlying economic activity happens: cash receipts or payments don’t determine recognition, budget approval isn’t the basis for recording, and posting timing isn’t the trigger for revenue or expense.

Under accrual accounting, revenues are recognized when earned and expenses are recognized when incurred. This means you record revenue when you’ve substantially completed the earning process and the amount is collectible, not when cash actually comes in. Similarly, you record an expense when the economic event occurs—when the resource is consumed or the obligation is incurred—so that costs are matched with the revenues they help generate in the same period. This approach aligns financial results with the business activities that occur, regardless of when cash moves. The other timing options reflect cash basis or administrative actions rather than when the underlying economic activity happens: cash receipts or payments don’t determine recognition, budget approval isn’t the basis for recording, and posting timing isn’t the trigger for revenue or expense.