Question

Indicate whether the following statements are applicable to the Cash receipts method or the Accrual method of accounting. All that is necessary for income recognition is that property or services received have a fair market value a cash equivalent.

Answer 1

Income recognition under the accrual method of accounting occurs when income is earned, and not necessarily when cash is received. This method uses the fair market value of property or services as a basis for income recognition, aligning with the matching principle.

Step-by-step explanation:

The statement relates to the accrual method of accounting. Under this method, income is recognized when it is earned, which can occur before or after cash is actually received. This contrasts with the cash receipts method, where income is recognized only when cash or a cash equivalent is received.

In the accrual method, recognizing income based on the fair market value of property or services, regardless of whether cash is received, is in line with the matching principle of accounting. This principle dictates that expenses be matched with revenues in the period they are incurred, irrespective of when cash movements take place. This approach provides a more accurate picture of a company's financial health over a given period.