Accrual Accounting Principles

B

With accrual accounting expenses are recognized when they are incurred, not when the cash is disbursed.

Under accrual accounting, the recognition of revenues and expenses is based on the accrual principle, which states that transactions should be recorded when they occur, rather than when the cash is received or paid. Based on this principle, the correct statements are:

I. Expenses are recognized as services are used: This statement is true. Under accrual accounting, expenses are recognized and recorded in the accounting period in which the related goods or services are consumed or utilized, regardless of when the cash payment is made. This allows for a more accurate matching of expenses with the revenues they generate.

II. Revenues are recognized when the service is performed: This statement is true. Accrual accounting recognizes revenue when the service has been performed or the goods have been delivered, regardless of when the cash is received. This ensures that revenue is recognized in the period in which it is earned, providing a more accurate reflection of the financial performance of the entity.

III. Cash outflows determine expense recognition: This statement is false. Accrual accounting is not based on cash flows. Instead, expenses are recognized when the related goods or services are consumed or utilized, regardless of when the cash payment is made. Cash outflows may or may not coincide with the recognition of expenses under accrual accounting.

Therefore, the correct answer is B. I & II, as both statements are true under accrual accounting.