Which statement correctly describes accrual accounting?

• A. Records transactions when the transaction occurs
• B. Based on cash receipts
• C. Used for accounts payable/receivable; Records transactions when the transaction occurs
• D. Only for cash basis reporting

Answer: (C)

Accrual accounting recognizes economic events when they occur and records revenues when earned and expenses when incurred, regardless of when cash actually changes hands. This timing is essential for matching revenues with the expenses that generated them and for reflecting obligations and rights through accounts payable and accounts receivable.

That’s why the best description is that accrual accounting is used for accounts payable/receivable and records transactions when the event occurs. It captures both the existence of obligations and the timing of recognition, not just cash movements.

The alternative describing cash receipts points to cash-basis reporting, which ignores the revenue/expense timing and is not how accrual accounting works. The notion of simply recording transactions when they occur is incomplete without tying the timing to earnings and incurred expenses, and it isn’t limited to cash-basis reporting, which makes it less accurate as a description.