Question

Compared to the accrual basis of accounting, the cash basis of accounting produces a lower amount of income by the net decrease during the accounting period of

Accounts Receivable Accrued Liabilities
a) Yes No
b) No Yes
c) Yes Yes
d) No No

Answer 1

The cash basis of accounting recognizes revenue and expenses when cash is received or paid, respectively. The accrual basis of accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of cash flow. Comparatively, the cash basis produces a lower amount of income by the net decrease in accounts receivable.

Step-by-step explanation:

The cash basis of accounting recognizes revenue and expenses when cash is received or paid, respectively. On the other hand, the accrual basis of accounting recognizes revenue when it is earned, regardless of whether cash has been received, and expenses when they are incurred, regardless of whether cash has been paid.

Therefore, in the cash basis of accounting, income is only recognized when the cash is actually received. This means that if a company has accounts receivable, which represent sales that have been made but not yet paid for, those sales will not be included in the income until payment is received. In contrast, under the accrual basis of accounting, revenue is recognized when the sale is made, regardless of when cash is received.

Based on this, the correct answer is (b) No Yes.