Question

What does it mean when a revenue or expense must be accrued?

a) Recorded when cash is received or paid
b) Recorded when incurred, regardless of cash exchange
c) Recorded only at the end of the fiscal year
d) Recorded based on projected estimations

Answer 1

Accrued revenues and expenses are recorded when incurred, not when cash is exchanged, following the accrual accounting principle.

Step-by-step explanation:

When a revenue or expense must be accrued, it means it is b) Recorded when incurred, regardless of cash exchange. This concept is essential in accrual accounting, where transactions are recorded at the time they are earned or incurred, not when cash is exchanged. The principle ensures that financial statements reflect the economic activity of a period accurately, aligning with the matching principle where expenses are matched to the revenues they help generate.

Accrued revenue or expense means recording them when they are incurred, regardless of cash exchange. This means that even if cash has not been exchanged yet, the revenue or expense is recognized as soon as it is earned or incurred. This is important for proper financial reporting and to reflect the true financial position of a business. For example, a company may provide services to a customer in one month but receive payment for those services in the next month. In this case, the revenue should be accrued in the month when the services were provided, even if cash has not been received yet.