Accrual Accounting for Accurate Profit Measurement

Steps:

• Identify accrued income as revenue earned but not yet received by period-end.
• Apply accrual basis: recognize income when earned, not when cash is received.
• Calculate profit by adding accrued income to cash receipts for the period.
• Adjust financial statements to reflect true economic activity, avoiding cash-basis distortions.

Why D is correct:

• Under accrual accounting principles (e.g., matching concept), accrued income is recorded to include all earned revenue, ensuring profit reflects actual performance rather than cash flow timing.

Why the others are wrong:

• A: Accrued income increases assets (receivables), not affecting current liabilities.
• B: It has no direct impact on current liabilities, which relate to expenses or obligations.
• C: Without accrual, earned income is omitted, understating profit, not overstating it.

Final answer: D