Modified cash basis accounting records income and expenses on a cash basis with selected items recorded on an accrual basis. Which statement describes this method?

Modified cash basis accounting records income and expenses on a cash basis with selected items recorded on an accrual basis. Which statement describes this method?

• A. Records income and expenses on a cash basis with selected items recorded on an accrual basis.
• B. Records income on an accrual basis and expenses on a cash basis.
• C. Is identical to the full accrual basis of accounting.
• D. Ignores accruals entirely.

Answer: (A)

Modified cash basis uses a hybrid approach: most income is recorded when cash is received and most expenses when cash is paid, but certain items are handled on an accrual basis to better reflect economic activity. This means depreciation on capital assets (and sometimes other accrued items) is recognized on an accrual basis, while the rest follows cash timing. That combination precisely describes recording income and expenses on a cash basis with selected items on an accrual basis. It isn’t full accrual, and it isn’t purely cash, because those specific accrual treatments are used for selected items.

Modified cash basis uses a hybrid approach: most income is recorded when cash is received and most expenses when cash is paid, but certain items are handled on an accrual basis to better reflect economic activity. This means depreciation on capital assets (and sometimes other accrued items) is recognized on an accrual basis, while the rest follows cash timing. That combination precisely describes recording income and expenses on a cash basis with selected items on an accrual basis. It isn’t full accrual, and it isn’t purely cash, because those specific accrual treatments are used for selected items.