Which statement about accruals in practice is correct?

Which statement about accruals in practice is correct?

• A. Advertising prepaid should be included in the current year's accounts.
• B. Revenue earned is recognized only when cash is received.
• C. Electricity bill for the current year should be included, even if not yet paid.
• D. All revenue should be recognized on receipt of cash.

Answer: (C)

The main idea being tested is accrual accounting: expenses are recognised in the period they relate to, not when cash is paid, and revenues are recognised when earned, not when cash is received. For the electricity bill, even if the bill hasn’t been paid yet, the service has been used in the current year, so the cost must be included in the accounts for that year. You record an expense for electricity and a liability for the amount owed. The entry would be to debit Electricity expense and credit a liability such as Accrued expenses (or Accounts payable). When payment occurs later, you would reverse by debiting the liability and crediting cash. This keeps the expense matched to the year in which the electricity was consumed. Why the other ideas aren’t aligned with accruals: recognising revenue only when cash is received is cash basis, not accruals. Saying all revenue is recognised on receipt of cash likewise reflects cash basis. Advertising prepaid is a prepayment that should be shown as an asset (prepaid expense) and expensed over the periods it benefits, rather than being fully charged as an expense in the current year.

The main idea being tested is accrual accounting: expenses are recognised in the period they relate to, not when cash is paid, and revenues are recognised when earned, not when cash is received.

For the electricity bill, even if the bill hasn’t been paid yet, the service has been used in the current year, so the cost must be included in the accounts for that year. You record an expense for electricity and a liability for the amount owed. The entry would be to debit Electricity expense and credit a liability such as Accrued expenses (or Accounts payable). When payment occurs later, you would reverse by debiting the liability and crediting cash. This keeps the expense matched to the year in which the electricity was consumed.

Why the other ideas aren’t aligned with accruals: recognising revenue only when cash is received is cash basis, not accruals. Saying all revenue is recognised on receipt of cash likewise reflects cash basis. Advertising prepaid is a prepayment that should be shown as an asset (prepaid expense) and expensed over the periods it benefits, rather than being fully charged as an expense in the current year.