What are accruals in financial accounting?

Accruals in financial accounting refer to the recognition of revenues and expenses in the period they occur, regardless of when cash is exchanged. This concept is a fundamental part of the accrual basis of accounting, which aims to match revenues earned with the expenses incurred to generate those revenues within the same accounting period.

Option D captures this principle accurately, as it emphasizes that both revenues and expenses are recognized at the time they are incurred—without necessarily involving an immediate cash transaction. For instance, a company may recognize revenue when it delivers a product or provides a service, even if the customer has not yet paid. Similarly, expenses are recorded when they are incurred, such as when a company receives goods or services, regardless of when payment is made.

This approach contrasts with cash basis accounting, where revenues and expenses are recorded only when cash is received or paid. Understanding accruals is essential for accurately reflecting a company's financial performance and position, as it provides a more comprehensive view of financial activities than cash transactions alone.