Accruals include which items?

Accruals include which items?

• A. Deferred Revenues and Prepaid Expenses
• B. Accrued Liabilities and Accrued Receivables
• C. Unearned Revenues and Prepaid Expenses
• D. Prepaid Expenses and Unearned Revenues

Answer: (B)

Accruals are about recognizing revenues and expenses in the period they are earned or incurred, regardless of when cash is exchanged. This means recording amounts for expenses that have accrued but not yet been paid (accrued liabilities) and revenues that have been earned but not yet billed or collected (accrued receivables). That combination—accrued liabilities and accrued receivables—is the essence of accruals. Deferrals like prepaid expenses and unearned revenues involve cash flows occurring before or after the related revenue or expense, but they are not accruals. Prepaid expenses are assets representing cash paid ahead of benefiting from the expense, and unearned revenues are liabilities for cash received before the revenue is earned. Hence, they are not accruals, which is why the correct pairing is accrued liabilities and accrued receivables.

Accruals are about recognizing revenues and expenses in the period they are earned or incurred, regardless of when cash is exchanged. This means recording amounts for expenses that have accrued but not yet been paid (accrued liabilities) and revenues that have been earned but not yet billed or collected (accrued receivables). That combination—accrued liabilities and accrued receivables—is the essence of accruals.

Deferrals like prepaid expenses and unearned revenues involve cash flows occurring before or after the related revenue or expense, but they are not accruals. Prepaid expenses are assets representing cash paid ahead of benefiting from the expense, and unearned revenues are liabilities for cash received before the revenue is earned. Hence, they are not accruals, which is why the correct pairing is accrued liabilities and accrued receivables.