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

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

• A. Cash basis
• B. Accrual basis
• C. Modified cash basis
• D. Tax basis

Answer: (B)

Accrual accounting records revenue when it is earned and expenses when they are incurred. This means revenue is recognized when the goods are delivered or the services are performed, not when cash actually arrives. Likewise, expenses are recorded when the obligation to pay arises, not when the payment is made. This approach links income and the costs that generated it within the same period, giving a more accurate picture of financial performance and the organization’s financial position over time. For example, in a community association, dues billed in a month may not be collected until later, but under accrual accounting those dues are counted as revenue in the month they’re earned. Similarly, maintenance work performed in a month is recorded as an expense in that month even if the payment to the vendor occurs later. Cash basis, by contrast, only records revenue when cash is received and expenses when cash is paid, which can distort timing of income and costs. Modified cash basis blends elements of both, and tax basis follows rules specific to tax reporting, which may differ from accrual principles.

Accrual accounting records revenue when it is earned and expenses when they are incurred. This means revenue is recognized when the goods are delivered or the services are performed, not when cash actually arrives. Likewise, expenses are recorded when the obligation to pay arises, not when the payment is made. This approach links income and the costs that generated it within the same period, giving a more accurate picture of financial performance and the organization’s financial position over time.

For example, in a community association, dues billed in a month may not be collected until later, but under accrual accounting those dues are counted as revenue in the month they’re earned. Similarly, maintenance work performed in a month is recorded as an expense in that month even if the payment to the vendor occurs later.

Cash basis, by contrast, only records revenue when cash is received and expenses when cash is paid, which can distort timing of income and costs. Modified cash basis blends elements of both, and tax basis follows rules specific to tax reporting, which may differ from accrual principles.