Federal Nursing Home Administrator Practice Exam

What does "accrual" in accounting mean?

1. Recording revenue at the time of cash collection

2. Recording expenses as they are paid

3. Recording revenue when earned and expenses when incurred

4. Recording all transactions at year-end

The correct answer is: Recording revenue when earned and expenses when incurred

Accrual in accounting refers to the practice of recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash transactions occur. This concept aligns with the accrual basis of accounting, which provides a more accurate representation of a company’s financial position and performance over specific periods. For instance, if a service is provided in December but not paid for until January, under the accrual method, the revenue would be recorded in December when the service was performed. Similarly, expenses incurred in December, even if paid in January, would also be recorded in December. This practice allows for a clearer view of financial results, matching revenues to the expenses directly associated with generating those revenues within the same period, providing stakeholders with the most relevant information about a company’s operations. The alternatives reflect other accounting practices; for example, cash accounting records revenues and expenses only when cash changes hands, while year-end recordings of transactions do not capture the ongoing financial activity throughout the period. Consequently, understanding accrual accounting is essential for accurately preparing financial statements and compliance with accounting standards.