Under the accrual principle, which statement is true?

• A. It recognizes revenues when earned and expenses when incurred, regardless of cash movements.
• B. It recognizes revenues when cash is received and expenses when incurred, regardless of cash movements.
• C. It recognizes revenues and expenses when cash is received or paid.
• D. It ignores non-cash transactions.

Answer: (A)

Under the accrual basis of accounting, the timing of recognizing revenues and expenses matches when the economic activity occurs, not when cash changes hands. Revenues are recorded when earned—when goods are delivered or services are performed—even if cash is not received yet. Expenses are recorded when incurred—when the related benefit or service is received—regardless of when payment is made. This approach ties revenue to the expenses incurred to generate it, a relationship known as the matching concept.

For example, a sale on credit counts as revenue when the sale occurs, even if the customer pays later. Likewise, utility costs are recognized as an expense in the period the utility service is consumed, even if the bill is paid in a later period.

The other statements describe cash-basis timing (revenue when cash is received; expenses when cash is paid) or suggest ignoring non-cash transactions, which does not apply under accrual accounting.