Under which accounting principle are revenues recognized at the point of sale and expenses recognized when incurred, irrespective of cash flow?

• A. Cash Basis
• B. Accrual Principle
• C. Going Concern
• D. Conservatism

Answer: (B)

Accrual basis accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash moves. This means you record revenue at the point you deliver goods or perform the service, even if cash hasn’t been received yet, and you record an expense when the obligation to pay arises, even if payment occurs later. The idea behind this timing is the matching principle: it aligns the income earned with the costs incurred to earn that income in the same period, giving a clearer picture of profitability. For example, a sale on credit records revenue when the sale happens and creates accounts receivable; the cash receipt later does not change the revenue timing. Similarly, an expense is recognized when the related good or service is used, not when cash is paid. In contrast, cash basis would wait for cash receipts and payments, which distorts when income and expenses are recognized. Going concern and conservatism deal with other aspects of financial reporting, not the timing of revenue and expense recognition.