Which accounting method records income when it is earned and expenses when incurred?

Which accounting method records income when it is earned and expenses when incurred?

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

Answer: (A)

The key idea here is recognizing income and expenses in the period they are earned or incurred, not when cash moves. Accrual accounting follows the revenue recognition and matching principles: you record revenue when you have earned it (goods delivered or services performed, with collection reasonably assured) and you record expenses when the related obligation arises (not necessarily when you pay). For example, if you perform a service in December but get paid in January, accrual accounting records the revenue in December. If you incur wages in December but pay them in January, accrual accounting records the wage expense in December. Other methods shift timing to cash flows or tax rules, but they don’t match revenues to the periods in which they are earned and expenses to the periods in which they are incurred, which is why accrual accounting is the correct method here.

The key idea here is recognizing income and expenses in the period they are earned or incurred, not when cash moves. Accrual accounting follows the revenue recognition and matching principles: you record revenue when you have earned it (goods delivered or services performed, with collection reasonably assured) and you record expenses when the related obligation arises (not necessarily when you pay).

For example, if you perform a service in December but get paid in January, accrual accounting records the revenue in December. If you incur wages in December but pay them in January, accrual accounting records the wage expense in December.

Other methods shift timing to cash flows or tax rules, but they don’t match revenues to the periods in which they are earned and expenses to the periods in which they are incurred, which is why accrual accounting is the correct method here.