Final Answer:
"An item is generally included in gross income for the year in which it is earned, regardless of when it is collected." This statement is applicable to the Accrual method of accounting.
Step-by-step explanation:
The accrual method of accounting recognizes revenue when it is earned, irrespective of when the payment is received. In this method, income is recorded as soon as it's earned, even if the cash is received later. For example, if a service is provided in December but the payment is received in January, the revenue is still recognized in December.
This is based on the principle of matching revenue with the period in which it is earned, providing a more accurate depiction of a business's financial performance. The Accrual method ensures that financial statements reflect the economic reality of transactions, offering a more comprehensive view of a company's financial position. This stands in contrast to the Cash receipts method, where income is recognized only when cash is received.
In mathematical terms, for a service provided in December but payment received in January, under the accrual method, the revenue is recorded as:
December Revenue = X
January Cash Receipts = 0
While under the cash receipts method, revenue would be recognized in January when the cash is received. The accrual method is widely used in businesses with credit transactions or when there's a time gap between the delivery of goods or services and the receipt of payment, providing a more accurate picture of a company's financial health.