Accruals refer to revenues earned or expenses incurred before cash has been exchanged. Which statement best describes this concept?

• A. Cash is exchanged at the time revenue is earned
• B. Accruals require cash to be exchanged before recognition
• C. Revenues earned or expenses incurred before cash has been exchanged
• D. Depreciation is recorded when an asset loses value

Answer: (C)

Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash is received or paid. This means you can recognize revenue before cash is exchanged (for example, a service performed now and billed later) and recognize an expense before cash leaves (like using utilities this month but paying next month). The statement that revenues earned or expenses incurred before cash has been exchanged describes this timing idea exactly. A contrast would be cash is exchanged at the time revenue is earned, which describes cash basis accounting, not accrual. Depreciation notes when an asset’s cost is allocated over time and is a noncash expense, not about when cash is exchanged for revenue or expenses.