Future Business Leaders of America (FBLA) Agribusiness Practice Test

Which of the following is an essential aspect of accrual accounting?

1. Recording revenue when cash is received

2. Matching revenue with the expenses incurred to generate it

3. Valuing assets based on historical cost

4. Recognizing long-term assets only at sale

The correct answer is: Matching revenue with the expenses incurred to generate it

Accrual accounting fundamentally revolves around the principle of matching revenue with the expenses incurred to generate that revenue. This means that revenue is recognized when it is earned, regardless of when cash is received, and expenses are recorded when they are incurred, not necessarily when they are paid. This matching principle provides a more accurate representation of a company's financial performance over a period, as it aligns the costs of doing business with the revenue those costs helped to generate. It also allows businesses to reflect their economic activities more completely, leading to better decision-making based on the financial statements. In contrast, the other options do not align with the principles of accrual accounting. Recording revenue when cash is received refers to cash accounting, which does not consider the timing of when services are performed or goods are delivered. Valuing assets based on historical cost is a method used in both accrual and cash accounting but does not specifically pertain to the matching principle. Recognizing long-term assets only at sale ignores the periodic depreciation and expenses that should be matched against revenues in accrual accounting. Therefore, the correct focus on matching revenue with associated expenses makes this aspect of accrual accounting essential.