Which statement describes accrual basis accounting?

Which statement describes accrual basis accounting?

• A. Recording revenue when cash is received and expenses when cash is paid
• B. Reporting income when the cash is received and expenses when the cash is paid
• C. Reporting income when it is earned and expenses when they are incurred
• D. Only recording transactions at year-end

Answer: (C)

Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. This follows the matching idea, recognizing the income in the same period as the related costs. For example, providing a service in December but collecting in January means revenue is recorded in December; incurring an expense in December but paying in January means the expense is recorded in December. The other statements describe cash-based timing (revenue when cash is received, expenses when cash is paid) or imply recording only at year-end, which are not how accrual accounting works.

Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. This follows the matching idea, recognizing the income in the same period as the related costs. For example, providing a service in December but collecting in January means revenue is recorded in December; incurring an expense in December but paying in January means the expense is recorded in December. The other statements describe cash-based timing (revenue when cash is received, expenses when cash is paid) or imply recording only at year-end, which are not how accrual accounting works.