What is the meaning of accrual accounting?

Accrual accounting is a fundamental principle in financial accounting that recognizes revenues and expenses when they are incurred, irrespective of when cash is actually exchanged. This method provides a more accurate picture of a company's financial performance during a particular period because it matches revenues earned with the expenses incurred to generate those revenues. This matching principle is crucial for stakeholders looking to understand the company's true operational outcomes, regardless of cash flow timing.

For example, if a company provides a service in December but receives payment in January, under accrual accounting, the revenue would be recognized in December. Similarly, if a company incurs an expense in December but pays for it in January, the expense would also be recognized in December. This approach allows for a better alignment of income and expenses in the financial statements, leading to enhanced decision-making for investors, creditors, and management.

In contrast, the other options reflect concepts that do not align with accrual accounting principles. Recognizing revenues only when cash is received and focusing solely on cash transactions, for instance, pertain to cash accounting, which can distort the financial health picture of a business during specific periods. Therefore, option B aptly captures the essence of accrual accounting by underscoring the recognition of economic events as they occur, independent of cash