Certified Meeting Professional (CMP) Practice Exam

Accrual accounting records items based on which of the following?

1. When cash is received

2. Financial obligations

3. Net worth when they are incurred

4. Duration of the billing cycle

The correct answer is: Net worth when they are incurred

Accrual accounting is a method that recognizes revenue and expenses when they are incurred, regardless of when cash is exchanged. This means that transactions are recorded as they happen, providing a more accurate picture of a business's financial position over time. This approach allows for a consistent reflection of income and obligations in the financial statements, which is crucial for effective financial management and reporting. The concept captures the economic reality of transactions, ensuring that income earned and expenses incurred are matched in the same accounting period. This is essential for stakeholders to understand the true profitability and financial health of an organization. Therefore, the rationale behind the chosen answer highlights the core principle of accrual accounting.