Which statement best describes accrual basis accounting?

• A. Revenues and expenses are recorded when cash is received or paid.
• B. Revenues are recorded when earned and expenses when incurred, regardless of cash.
• C. Revenues are recorded only when cash is received, and expenses when paid.
• D. Revenue recognition is deferred until tax is filed.

Answer: (B)

Accrual basis accounting records revenues when the service or product is delivered (earned) and expenses when the obligation to pay arises (incurred), regardless of when cash actually changes hands. This follows the idea that financial results should reflect the economic activity of the period, not just the cash movements.

For example, if you complete a service in December but bill and receive payment in January, the revenue is recognized in December. Likewise, if you incur an expense in December (like utilities used) but pay the bill in January, the expense is recognized in December. On the balance sheet, you’d see accounts that capture these timing differences—receivables for earned but not yet paid revenues, and payables for incurred but not yet paid expenses.

This is different from cash basis accounting, which only records revenue when cash is received and expenses when cash is paid. The statement that revenue is recorded only when cash is received or that expenses are recorded only when paid describes cash basis, not accrual. The idea that revenue recognition would be deferred until tax is filed isn’t how accrual accounting works. Accrual focuses on when activity occurs, not on tax timing.