Question

A company maintains its records using cash-basis accounting:

a) Recognize revenue when earned
b) Record expenses when incurred
c) Follow the accrual-basis accounting principles
d) Include accounts receivable in financial statements

Answer 1

Cash-basis accounting recognizes revenue when earned and expenses when incurred, and does not include accounts receivable in financial statements.

Step-by-step explanation:

Cash-basis accounting is a method used by a company to maintain its financial records. Under this method, the company recognizes revenue when it is earned, and records expenses when they are incurred. This means that revenue is only recorded when the company receives cash, and expenses are only recorded when the company pays cash.

Accrual-basis accounting, on the other hand, follows the accrual accounting principles where revenue is recognized when it is earned, regardless of when the cash is received, and expenses are recorded when they are incurred, regardless of when the cash is paid.

Under cash-basis accounting, accounts receivable are not included in the financial statements because revenue is only recorded when cash is received. Therefore, if a company has not yet received payment for a sale, it would not be reflected in the financial statements.