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Questions and Answers
Why does the cash basis of accounting not provide a good picture of profitability?
Why does the cash basis of accounting not provide a good picture of profitability?
- It overemphasizes revenue collection
- It ignores revenue that has been earned but not yet collected (correct)
- It recognizes revenue in the period it is earned
- It matches revenue and expenses effectively
What does the accrual basis of accounting emphasize?
What does the accrual basis of accounting emphasize?
- Cash inflow and outflow
- Matching of revenue and related expenses (correct)
- Expense payment timing
- Immediate revenue recognition
Under cash basis accounting, when is revenue recorded?
Under cash basis accounting, when is revenue recorded?
- When expenses are paid
- When an invoice is issued
- When earned
- When received in cash (correct)
What does the accrual basis of accounting recognize in the period in which it is earned?
What does the accrual basis of accounting recognize in the period in which it is earned?
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To work successfully, what does accrual basis accounting require at the end of each accounting period?
To work successfully, what does accrual basis accounting require at the end of each accounting period?
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Study Notes
Accounting Bases
- The cash basis of accounting does not provide a good picture of profitability because it only recognizes revenue when cash is received and expenses when cash is paid.
Accrual Basis of Accounting
- Emphasizes the recognition of revenue and expenses when earned or incurred, regardless of when cash is received or paid.
- Recognizes revenue in the period in which it is earned, regardless of when cash is received.
- Requires that expenses be matched with revenues in the same period, regardless of when cash is paid.
- To work successfully, accrual basis accounting requires accurate estimation and allocating of revenues and expenses at the end of each accounting period.
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