Cash-based versus accrual accounting: which statement is true?

Cash-based versus accrual accounting: which statement is true?

• A. Cash-based recognizes revenue when services are performed.
• B. Accrual recognizes revenue when cash is received.
• C. Accrual recognizes revenue when collection is reasonably certain and expenses when incurred.
• D. Cash-based and accrual are identical.

Answer: (C)

Under accrual accounting, revenues are recognized in the period they are earned and when collection is reasonably certain, and expenses are recognized in the period they are incurred. This contrasts with cash-based accounting, which records revenue only when cash is received and expenses only when cash is paid. The statement that matches accrual timing says revenue is recognized when collection is reasonably certain and expenses are recognized when incurred. The other statements mix up these timing rules or claim both methods are the same, which isn’t accurate.

Under accrual accounting, revenues are recognized in the period they are earned and when collection is reasonably certain, and expenses are recognized in the period they are incurred. This contrasts with cash-based accounting, which records revenue only when cash is received and expenses only when cash is paid. The statement that matches accrual timing says revenue is recognized when collection is reasonably certain and expenses are recognized when incurred. The other statements mix up these timing rules or claim both methods are the same, which isn’t accurate.