What describes accrual accounting?

• A. Records revenues and expenses when they occur, not necessarily when cash changes hands.
• B. Records revenues and expenses when cash changes hands
• C. It is rarely used in practice
• D. Records revenues at the end of the year only

Answer: (A)

Accrual accounting records revenues when they are earned and expenses when they are incurred, regardless of when cash actually changes hands. This mirrors the matching principle: the finances reflect the actions that occurred in the same time period, so you see the true profitability of a project for that period. In practice, this means you bill and recognize revenue as work is performed, even if the client pays later, and you record costs when the related work or obligation occurs, not when you pay the bill. This approach provides a more accurate, period-by-period view of financial performance and is standard for GAAP-based reporting and project-based firms. The other ideas—waiting for cash to flow to recognize revenue, claiming it’s rarely used, or only recognizing revenue at year’s end—do not align with how accrual accounting actually functions.