Under accrual accounting, when are expenses recorded?

Under accrual accounting, expenses are recorded when they have been incurred, which aligns with the core principles of this accounting method. This approach emphasizes recognizing economic events as they occur, rather than when cash transactions take place.

In practical terms, this means that if a business receives a service or product, it is necessary to record the expense at that time, even if payment is deferred to a later date. For example, if a healthcare practice receives medical supplies on credit, the expense would be recorded upon receipt of those supplies rather than when payment is made. This method provides a more accurate picture of the organization’s financial status by matching expenses with the revenues they helped to generate within the same accounting period, thus offering better financial insights and allowing for more precise budgeting and forecasting.

Cash accounting, on the other hand, records expenses only when cash is paid, which would not capture the economic reality of obligations as they are incurred. The other options, such as recording expenses when services are rendered or at the end of the fiscal year, do not encapsulate the ongoing obligation principle of accrual accounting. Therefore, recognizing expenses as they are incurred is fundamental to maintaining accurate financial records and ensuring compliance with generally accepted accounting principles (GAAP).