Question

Determine if each of the following descriptions relates to an accrual or a cash basis of accounting.

1) Accrual basis
2) Cash basis

Answer 1

Accrual basis of accounting records revenue and expenses when they are earned or incurred, while cash basis records revenue and expenses when the cash is received or paid.

Step-by-step explanation:

Accrual basis of accounting is when revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid. It focuses on matching revenues with expenses in the same accounting period.

Cash basis of accounting is when revenue and expenses are recorded only when the cash is received or paid. It does not consider revenue until the payment is received and expenses until the payment is made.

For example, if a business delivers goods to a customer in December but does not receive payment until January, the accrual basis would record the revenue in December, while the cash basis would record the revenue in January when the cash is received.