Under the accrual basis of accounting, when are transactions recognised and reported in the financial statements?

• A. A When cash is received
• B. B When cash is paid
• C. C When the transaction occurs and is reported in the period to which it relates
• D. D When the financial statements are prepared

Answer: (C)

Under accrual accounting, transactions are recognised when the event that creates the financial effect occurs, and they are reported in the period to which that event relates. This means revenue is recognised when the goods are delivered or services are performed, and expenses are recognised when they are incurred to generate those revenues, regardless of when cash is received or paid.

This approach aligns the income and related costs in the same period, giving a true picture of performance and financial position. For example, a sale on credit is recognised at the point of sale with a receivable, even if cash is collected later. Likewise, depreciation is recognised over the period the asset contributes to earning revenue, not when the initial cash outlay happened.

The timing is about when the economic activity occurs, not about when cash changes hands or when the financial statements are prepared. Recognising only on cash movements would not reflect the true financial results of the period.