Certified Financial Management Specialist Practice Exam

Accrual accounting records income when which event occurs?

1. When received

2. When earned

3. When expenses are paid

4. When profitability is achieved

The correct answer is: When earned

Accrual accounting is based on the principle of recognizing revenue when it is earned, regardless of when the cash is actually received. This approach aligns with the revenue recognition principle, which states that revenue should be recorded when it is realizable and earned, typically when goods are delivered or services are performed, not necessarily when payment is made. This method provides a more accurate picture of a company's financial performance during a specific period by matching income earned with the expenses incurred to generate that income. In contrast, recording income when received focuses on cash transactions, which is characteristic of cash accounting rather than accrual accounting. Similarly, tracking expenses based on when they are paid or linking income recognition to profitability does not align with the core tenet of accrual accounting, which centers on the timing of the earning of revenue. Therefore, the correct understanding of accrual accounting is encapsulated by the notion that income should be recorded when it has been earned.