Under the accrual method of accounting, revenues and expenses are recorded when which of the following occurs?

• A. Cash is received for both revenues and expenses are recorded only when cash is paid in the following period
• B. Revenues are earned and expenses are incurred, regardless of when cash is received or paid
• C. Management decides to recognize revenues and expenses at year-end to match the budget
• D. Cash is received for revenues and cash is paid for expenses

Answer: (B)

Verified step by step guidance

1. Understand the accrual basis of accounting, which requires recognizing revenues and expenses when they are earned or incurred, not necessarily when cash changes hands.
2. Recall that under the accrual method, revenue is recorded when the company has delivered goods or services and earned the right to receive payment, regardless of when the cash is actually received.
3. Similarly, expenses are recorded when they are incurred, meaning when the company has received goods or services and has an obligation to pay, regardless of when the payment is made.
4. Contrast this with the cash basis of accounting, where revenues and expenses are recorded only when cash is received or paid, which is not the accrual method.
5. Therefore, the correct recognition point under the accrual method is when revenues are earned and expenses are incurred, independent of cash transactions.