Which statement about accrual accounting is true?

• A. Revenue and expenses are recognized only when cash is received or paid.
• B. Revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of when cash is received or paid.
• C. Accrual accounting eliminates the need to record accounts receivable and accounts payable.
• D. Accrual accounting recognizes revenue when cash is received but recognizes expenses when they are incurred.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the basic principle of accrual accounting, which is to recognize revenues and expenses when they are earned or incurred, not necessarily when cash is received or paid.
2. Step 2: Review the options given and identify which aligns with the accrual accounting principle. The key is to focus on the timing of revenue and expense recognition relative to cash flows.
3. Step 3: Note that the statement 'Revenue and expenses are recognized only when cash is received or paid' describes cash basis accounting, not accrual accounting.
4. Step 4: Recognize that accrual accounting requires recording accounts receivable (revenues earned but not yet received in cash) and accounts payable (expenses incurred but not yet paid in cash), so the statement eliminating these accounts is incorrect.
5. Step 5: Confirm that the correct statement is that revenue is recognized when earned and expenses when incurred, regardless of cash movement, which is the fundamental concept of accrual accounting.