Question

The approach to preparing financial statements based on recording revenues when products and services are delivered and recording expenses when incurred is:

Multiple Choice
1) Cash basis accounting.
2) The expense recognition (Matching) principle.
3) The time period assumption.
4) Accrual basis accounting.
5) Revenue basis accounting

Answer 1

The method of preparing financial statements by recording revenues when earned and expenses when incurred is known as accrual basis accounting. This aligns with the expense recognition principle, which differs from cash basis accounting that records transactions only when cash changes hands.

Step-by-step explanation:

The approach to preparing financial statements based on recording revenues when products and services are delivered and recording expenses when incurred is known as accrual basis accounting. This method aligns with the expense recognition (Matching) principle, which states that expenses should be matched to the revenues they help to generate within the same accounting period. Cash basis accounting, on the other hand, records revenues and expenses only when cash is exchanged. The time period assumption denotes that financial reports should cover a specific period, while revenue basis accounting is not a commonly used term in this context.