Final answer:
The statement about an accrual-method business deferring income recognition until goods are delivered is true. This method matches income with the period in which the goods or services are provided and reflects the accrual accounting principle of the matching concept, recording advance payments as a liability.
Step-by-step explanation:
The statement is true: an accrual-method business receiving an advance payment for goods that it will provide to customers in the future must account for the prepayment for tax purposes under the deferral method. Income recognition is deferred under this method until the goods are delivered or services are performed. This approach aligns the recognition of income with the economic activity that generates that income and adheres to the matching principle of accounting.
Under the accrual accounting method, revenues and expenses are recorded when they are earned or incurred, irrespective of when the cash is actually received or paid. Thus, when a business receives an advance payment, it is recorded as a liability on the balance sheet in a T-account format, indicating that there is an obligation to deliver goods or services in the future.
It is important to understand that recognizing the income this way might affect how transaction costs are recognized and how a business is seen as a unit of account. When the prepayment is made—as in a time deposit or certificate of deposit—the depositor receives a higher interest rate for agreeing to leave the money for a specified period. In the case of business prepayments, it postpones the recognition of income for tax purposes, which has its implications for financial planning and reporting.