Virginia Contractor General Practice Test

What is the primary focus of accrual accounting?

1. Record expenses only

2. Match income with expenses

3. Report cash flow

4. Only reflect cash transactions

The correct answer is: Match income with expenses

The primary focus of accrual accounting is to match income with expenses. This accounting method recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash transactions occur. This approach provides a more accurate picture of a company's financial performance over a specific period because it accounts for all resources that contribute to income and costs, ensuring that the financial statements reflect the company's operational results rather than just its cash movement. For instance, if a company provides a service in March but doesn't receive payment until April, under accrual accounting, the income from that service would still be recorded in March. Similarly, if expenses are incurred in March but paid in April, those expenses would also be recorded in March. This matching principle is fundamental to accrual accounting as it gives stakeholders a better understanding of a company's profitability and financial health within a given timeframe. Other accounting methods, like cash accounting, focus more on actual cash transactions. Such methods do not provide this comprehensive view and can misrepresent a company's financial status because they ignore revenues and expenses that are not directly tied to cash flow in the current period.