Question

The accrual basis of accounting:____________

A. Is generally accepted for external reporting because it gives more useful information.
B. Is flawed because it gives complete information about cash flows.
C. Recognizes revenues when received in cash.
D. Recognizes expenses when paid in cash.

Answer 1

A. Is generally accepted for external reporting because it gives more useful information.

Step-by-step explanation:

Accrual Basis of Accounting states that: Transactions should be recorded when they are entered into, irrespective of cash settlement done or not.

For Eg: 'Sales' would be recognised & recorded when goods are sold & debtor's obligation / liability to pay has been established, whether cash has been received or not.

This basis of accounting provides a clearer picture of enterprise' performance during an accounting period (i.e financial year), by providing for the real expenses & revenues of that period only.

Eg: Outstanding Expense (due but not paid) if ignored on cash basis - would lead to underestimation of expenses & overestimation of profit.

So, Accrual System is generally accepted because it is more 'Relevant' i.e more useful to Accounting information users.