Question

Which of the following does not correctly describe the cash basis of accounting?

a) Records revenue when earned.
b) Recognizes expenses when paid.
c) Suitable for small businesses.
d) Follows the matching principle.

Answer 1

The incorrect statement about the cash basis of accounting is that it records revenue when earned; it actually records revenue when cash is received, not following the matching principle.

Step-by-step explanation:

The statement that does not correctly describe the cash basis of accounting is "Records revenue when earned."

In the cash basis of accounting, revenue is recorded when cash is actually received, not when it is earned.

This is in contrast with the accrual basis of accounting, where revenue is recorded when it is earned, regardless of when the money is received.

The cash basis of accounting does recognize expenses when paid, is considered suitable for small businesses due to its simplicity, and does not follow the matching principle, which is a cornerstone of the accrual basis of accounting.