Which of the following statements about accrual accounting is true ?

Which of the following statements about accrual accounting is true ?

Multiple Choice

A.Revenue is recorded only when cash is received.

B. Expenses are recorded when they are incurred.

C. Revenue is recorded in the period when it is earned.

D.Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred.

Answer: D.Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred.

This option correctly identifies the nature of its accounting based on the accrual method. In this method, the business records financial transactions based on the occurrence of an event of the business rather than the business has physically transferred or exchanged cash. Only there is recognition of Revenues when it is realised or where the control has passed to the buyer (where goods are delivered or services are provided even though cash may not have been received. Like expenses, they are recorded when they are accumulated when they are sold, regardless of the time when payment is made. It offers a better view of a company’s financial state and how it has been performing over time than the absolute form of the numbers. This provides for the appropriate match of expenses by associating them with the generated revenues hence providing a better perspective of profitability. Accrual accounting is commonly needed for large organizations, and it is looked at as of greater sophistication compared to cash accounting.