When are expenses recognized in accrual accounting?

In accrual accounting, expenses are recognized when they are incurred, regardless of when the payment is made. This principle aligns with the matching concept, which states that expenses should be matched with the revenues they help generate within the same accounting period.

For example, if a company receives services in December but pays for them in January, the expense would still be recorded in December, the month in which the service was used. This approach provides a more accurate financial picture of a company's performance, as it reflects all costs associated with generating the reported revenues for that period.

Recognizing expenses when cash is paid does not comply with the accrual basis, as it would ignore expenses that have already been incurred. Simply recording an expense when an invoice is received could also lead to mismatches in the financial statements, as it doesn't account for the timing of the actual service or product usage. Recognizing expenses only at the end of the accounting year could fail to capture all incurred costs and lead to misleading financial results throughout the year. Thus, the correct approach under accrual accounting is to recognize expenses when they are incurred.