Future Business Leaders of America (FBLA) Agribusiness Practice Test

What describes accrual accounting?

1. Income is reported when received and expenses when paid

2. Income is reported in the year earned and expenses coinciding with the income

3. All revenues are recognized at year-end

4. Expenditures are recorded when cash is paid

The correct answer is: Income is reported in the year earned and expenses coinciding with the income

Accrual accounting is a method that focuses on recognizing income and expenses when they are earned or incurred, rather than when cash is actually received or paid. This approach provides a more accurate picture of a company's financial performance over a specific period because it aligns income with the expenses that helped generate that income. By reporting income in the year it is earned, accrual accounting captures the economic activity of a business, ensuring that financial statements reflect the true financial position rather than merely cash flows. This matching principle, where expenses are reported in the same period as the revenues they generate, is crucial as it helps stakeholders understand how efficiently the company is operating and how its resources are being utilized in relation to its earnings. This is particularly important for businesses that operate on credit or have long-term sales agreements, as it captures their profitability more accurately over time. Other options primarily reflect cash accounting principles, where transactions are recorded based on cash flow rather than the underlying economic activity.