Revenue Recognition and Expenses under Accrual Accounting
When is revenue recognized and expenses recorded under accrual accounting?
a. When cash is received, and expenses when cash is paid
b. When cash is received, and expenses when the costs are incurred
c. When earned, and expenses when the costs are incurred
d. When earned, and expenses when cash is paid
Answer:
In accrual accounting, revenue is recognized when it's earned, and expenses are recognized when they are incurred.
Explanation:
Under accrual accounting, revenue is recognized when earned, and expenses are recognized when the costs are incurred, thus the correct option would be c. 'When earned, and expenses when the costs are incurred'. This is based on the revenue recognition principle, which stipulates that income is recorded when the product or service is delivered/used regardless of when actual payment is made. Similarly, under the matching principle, expenses are recorded when they are incurred, regardless of when actual payment is made. This way, accrual accounting provides a more accurate reflection of a company's financial health at any given point in time.