In accrual accounting, what must be recognized regardless of cash flow?

In accrual accounting, both expenses and revenue must be recognized regardless of cash flow. This principle centers around the idea that financial transactions are recorded when they occur, rather than when cash is actually received or paid.

For revenue, this means that income is recognized when it is earned, which typically occurs when goods are delivered or services are performed, even if the customer has not yet paid. This provides a more accurate representation of a company’s performance within a given period, reflecting the economic activities that have taken place.

Similarly, expenses are recognized in the period in which they are incurred, regardless of when cash is disbursed. This matching principle of accounting ensures that expenses are aligned with the revenues they help to generate, allowing for a clearer view of profitability and financial position during the accounting period.

This comprehensive recognition of both expenses and revenue ensures that financial statements give a complete picture of the company's operations and performance over time, consistent with the accrual basis of accounting.