Question

Accruals involve transactions where the cash outflow or inflow takes place in a period ______ expense or revenue recognition.

a)before
b)the same as
c)after

Answer 1

Accruals involve transactions where the cash outflow or inflow takes place before expense or revenue recognition.

Step-by-step explanation:

Accruals involve transactions where the cash outflow or inflow takes place before expense or revenue recognition. This means that the cash may be received or paid in a different period than when the expense or revenue is recognized on the financial statements.

For example, if a company provides services to a customer in December but doesn't receive payment until January, the revenue is recognized in December as per the accrual accounting principle. The cash is received later in January.

Similarly, if a company incurs expenses for utilities in December but pays the bill in January, the expense is recognized in December and not when the cash is paid in January.