Certified Meeting Professional (CMP) Practice Exam

In accrual accounting, when are income and expenses recognized?

1. When they are paid

2. When they are earned or incurred

3. At the end of the accounting period

4. When a contract is signed

The correct answer is: When they are earned or incurred

In accrual accounting, income and expenses are recognized when they are earned or incurred, not necessarily when cash transactions occur. This means that revenue is recorded at the time it is earned—when goods are delivered or services rendered—regardless of when payment is received. Similarly, expenses are recognized when they are incurred, which typically corresponds to the period in which the goods or services are received, rather than when they are paid for. This system provides a more accurate picture of a company's financial position and performance over a given period, aligning revenues and expenses to the period in which they actually occur, rather than just when cash is exchanged. This helps stakeholders understand the true financial state of the organization at any given time, facilitating better decision-making and financial reporting.