Which statement best describes accrual accounting's treatment of expenses?

• A. Recognizes expenses when paid.
• B. Recognizes expenses in the next fiscal year.
• C. Recognizes expenses only at year-end.
• D. Recognizes expenses when incurred, regardless of payment.

Answer: (D)

Under accrual accounting, expenses are recorded when incurred, regardless of when cash is paid. This follows the matching principle, which aligns the cost with the revenues or benefits it helps generate in the same period. For example, if you receive an invoice for services in December but pay it in January, the expense is recognized in December and a liability is recorded, not postponed until you actually pay. Prepaid expenses sit as assets and are expensed as the benefit is consumed. This approach differs from paying only when cash goes out, which is characteristic of cash-basis accounting. Recognizing expenses in the next fiscal year or only at year-end would misstate the true cost for the period.