The Power of Accrual Basis Accounting
What is the basis of accounting that records revenue when it is earned and expenses when they are incurred?
a. when it is earned and records expenses when they are incurred.
b. when it is earned and records expenses when they are paid in cash.
c. when it is received in cash and records expenses when they are incurred.
d. when it is received in cash and records expenses when they are paid in cash.
Answer:
The accrual basis of accounting records revenues when they are earned and expenses when they are incurred.
The accrual basis of accounting is a powerful tool that allows businesses to accurately reflect their financial performance, regardless of when cash transactions occur. This method follows the principle of recognizing revenue when it is earned and expenses when they are incurred.
By recording revenue when it is earned, businesses can show the true value of their operations and services provided, even if payment has not been received yet. This gives a more accurate picture of the company's financial health at any given time.
Similarly, recording expenses when they are incurred ensures that businesses are reflecting the true cost of operations, even if the payment for those expenses has not been made. This helps in matching expenses with the revenues they generate, providing a clearer view of profitability.
The accrual basis of accounting is essential for businesses to comply with accounting principles, such as revenue recognition and matching principles. It provides a more accurate and comprehensive view of a company's financial position, enabling better decision-making and financial planning.