Under which accounting method are revenues recognized when earned and expenses recognized when incurred?

Under which accounting method are revenues recognized when earned and expenses recognized when incurred?

• A. Cash Basis
• B. Accrual Basis
• C. Hybrid Basis
• D. Tax Basis

Answer: (B)

This question tests understanding of when revenues and expenses are recognized under different accounting methods. Under accrual accounting, revenues are recorded when they are earned—when the company has delivered goods or performed a service and the right to payment is established—regardless of whether cash has been received. Expenses are recorded when they are incurred—when the related benefit or obligation arises, not when a payment is made. This approach follows the matching principle, ensuring that revenues and the expenses that helped generate them are reported in the same period. Cash basis, by contrast, records revenues and expenses only when cash is received or paid, which can misalign income with the underlying transactions. Hybrid or tax-based methods may use different timing rules, but they do not reflect the universal rule of recognizing revenue when earned and expenses when incurred.

This question tests understanding of when revenues and expenses are recognized under different accounting methods. Under accrual accounting, revenues are recorded when they are earned—when the company has delivered goods or performed a service and the right to payment is established—regardless of whether cash has been received. Expenses are recorded when they are incurred—when the related benefit or obligation arises, not when a payment is made. This approach follows the matching principle, ensuring that revenues and the expenses that helped generate them are reported in the same period.

Cash basis, by contrast, records revenues and expenses only when cash is received or paid, which can misalign income with the underlying transactions. Hybrid or tax-based methods may use different timing rules, but they do not reflect the universal rule of recognizing revenue when earned and expenses when incurred.