What is accrual based accounting?

• A. Revenue and expense are recognized in the period in which service is performed or goods are delivered, regardless of when payment is made
• B. Revenue and expense are recognized in the period in which cash is received
• C. Transactions are recorded only when cash is exchanged
• D. Tax rules determine recognition

Answer: (A)

Accrual accounting records revenue when goods are delivered or services are performed and records expenses when they are incurred, regardless of when cash is received or paid. This timing follows the matching principle, which pairs revenues with the expenses that helped generate them in the same period. The result is a more accurate view of what happened financially during the period and the company’s ongoing performance.

So, revenue and expenses are recognized based on when the economic activity occurs, not when cash actually moves. That’s why the correct choice describes recognizing revenue and expenses in the period the service is performed or goods delivered, regardless of payment timing.

The other statements describe cash-basis timing, where recognition happens only when cash is received or paid, which can distort when income and costs are shown. Tax rules can influence reporting methods, but accrual accounting is about when economic events occur and is governed by accounting standards, not by tax rules.