Which of the following best describes the purpose of accrual accounting?

• A. It records revenues when earned and expenses when incurred
• B. It records revenues only when cash is received
• C. It ignores receivables
• D. It focuses only on cash flows

Answer: (A)

Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash is received or paid. This means if you perform a service this month but are paid next month, the revenue is recognized this month. Likewise, if you incur an expense this month but pay later, the expense is recognized now. This approach aligns income and the costs that helped generate it, giving a more accurate picture of profitability and financial position.

The other statements describe cash basis thinking: recording revenue only when cash is received ignores services already provided or expenses already incurred. Accrual accounting does not ignore receivables; it records them as assets when revenue is earned on credit. And while cash flows are important, accrual accounting focuses on when items are earned or incurred, not just when cash moves.