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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Which statement best describes how the accruals (matching) concept affects the recognition of expenses in the statement of profit or loss?

Expenses are recognised in the period in which they are incurred, whether or not cash has been paid. This is the accruals concept: costs are matched to the period that benefits from them, rather than following the timing of cash payments.

  1. AExpenses are recognised when cash is paid, regardless of when the related goods or services were used
  2. BExpenses are recognised in the period in which they are incurred, irrespective of when payment is madeCorrect
  3. CExpenses are recognised only when an invoice has been approved by management
  4. DExpenses are recognised in the period in which the related revenue is received in cash

Explanation

Under the accruals concept, expenses are recognised when incurred and matched to the period they relate to, not when cash is paid. Option A describes cash accounting, which ignores timing of consumption.

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