Accounting Online Program Certification Practice Test

In the context of accounting, what does accrual accounting ensure?

1. Income is recognized when cash is received

2. Expenses are recognized when paid

3. Transactions are recorded in the period they occur

4. All assets are recorded at historical cost

The correct answer is: Transactions are recorded in the period they occur

Accrual accounting ensures that transactions are recorded in the period they occur, regardless of when cash is exchanged. This method is essential for providing a more accurate representation of a company's financial position and operating performance. By recognizing revenue when earned and expenses when incurred, businesses can track their economic activities in the periods to which they relate, leading to better financial analysis and decision-making. This approach contrasts with cash accounting, where income and expenses are recorded only when cash is received or paid, which can result in misleading financial statements, particularly for businesses with significant receivables or payables. The principle of matching—where revenues and associated expenses are recognized in the same period—further underpins the accrual basis, enhancing the relevance and reliability of financial reporting. The other choices reflect methods that either do not align with accrual accounting principles or describe different accounting concepts, which further highlights why the correct answer accurately represents the core idea of accrual accounting.