Which basis recognizes revenue when earned and matches expenses to the revenues they helped produce?

Which basis recognizes revenue when earned and matches expenses to the revenues they helped produce?

• A. Cash basis accounting
• B. Accrual basis accounting
• C. Tax basis accounting
• D. Modified cash basis

Answer: (B)

Accrual basis accounting is tested here, focusing on when revenue and expenses are recognized. Under accrual accounting, revenue is recorded when the goods are delivered or the service is performed—when the earnings process is complete—regardless of when cash is actually received. At the same time, expenses are recognized in the period they help generate revenue, matching them to the related revenues they helped produce. This pairing, known as the matching principle, gives a truer picture of profitability for the period and aligns financial statements with economic activity. In contrast, cash basis records revenue only when cash is received and expenses only when cash is paid, which can distort timing and profitability. Tax basis and modified cash basis blend elements of cash and accrual in ways that don’t fully adhere to the matching principle for financial reporting.

Accrual basis accounting is tested here, focusing on when revenue and expenses are recognized. Under accrual accounting, revenue is recorded when the goods are delivered or the service is performed—when the earnings process is complete—regardless of when cash is actually received. At the same time, expenses are recognized in the period they help generate revenue, matching them to the related revenues they helped produce. This pairing, known as the matching principle, gives a truer picture of profitability for the period and aligns financial statements with economic activity.

In contrast, cash basis records revenue only when cash is received and expenses only when cash is paid, which can distort timing and profitability. Tax basis and modified cash basis blend elements of cash and accrual in ways that don’t fully adhere to the matching principle for financial reporting.