Which accounting method records income when earned and expenses when incurred?

Which accounting method records income when earned and expenses when incurred?

• A. cash basis
• B. accrual basis
• C. modified cash basis
• D. modified accrual basis

Answer: (B)

Accrual basis accounting recognizes income when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. This means revenue is recorded at the point goods or services are delivered and the earning process is complete, and expenses are recorded when the obligation to pay for goods or services arises. For example, if you deliver a service on credit, you record the revenue even though you may not receive payment yet, and you also record accounts receivable. Likewise, if you incur a cost to generate revenue, you record the expense in that same period even if you will pay later. This approach provides a more accurate picture of profitability and the financial position because it aligns income with the related expenses and recognizes obligations and resources as they exist. Cash basis records revenue only when cash is received and expenses only when cash is paid, which can distort timing of profits. Modified cash basis blends elements of both but does not fully apply the earned-and-incurred recognition. Modified accrual is used in some government contexts with different timing rules.

Accrual basis accounting recognizes income when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. This means revenue is recorded at the point goods or services are delivered and the earning process is complete, and expenses are recorded when the obligation to pay for goods or services arises.

For example, if you deliver a service on credit, you record the revenue even though you may not receive payment yet, and you also record accounts receivable. Likewise, if you incur a cost to generate revenue, you record the expense in that same period even if you will pay later. This approach provides a more accurate picture of profitability and the financial position because it aligns income with the related expenses and recognizes obligations and resources as they exist.

Cash basis records revenue only when cash is received and expenses only when cash is paid, which can distort timing of profits. Modified cash basis blends elements of both but does not fully apply the earned-and-incurred recognition. Modified accrual is used in some government contexts with different timing rules.