Which statement best defines accrual accounting as opposed to cash basis accounting?

• A. Revenues are recorded when earned and expenses incurred, regardless of cash receipts or payments.
• B. Revenues are recorded when cash is received and expenses when cash is paid.
• C. Revenues and expenses are recognized only when cash flows occur.
• D. Revenues are recorded when incurred and expenses when earned.

Answer: (A)

Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is actually received or paid. This timing matches income and related costs to the period in which the economic activity occurs, giving a more accurate picture of profitability. That’s why the statement stating that revenues are recorded when earned and expenses incurred, regardless of cash receipts or payments, best defines accrual accounting. The other descriptions describe cash-basis timing (revenue when cash is received and expenses when cash is paid) or mix up the earned/incurred timing, which isn’t how accrual accounting works.