Which of the following is true of accrual basis accounting and cash basis accounting?

Which of the following is true of accrual basis accounting and cash basis accounting?

A. Accrual accounting records revenue only when it is earned.

B. Cash basis accounting records all transactions.

C. Accrual accounting is not allowed under GAAP.

D. All of the above are true.

Answer: A. Accrual accounting records revenue only when it is earned.

The accrual basis of accounting recognizes the revenues when they have been earned regardless the cash has been received or not. This entails that revenue is booked when the firm delivers its products or services to the customer or even provides a service to the customer, where in most cases, there is a delay in payment. On the use of accrual accounting, it is pointed out that it offers a more realistic picture of a business’s earnings by ensuring that the revenues obtained are associated with the expenses made at the same period.

The other type of accounting is called the cash basis of accounting and this records revenue only when cash has been received irrespective of when the goods or services that were sold were rendered. As with many of these methods, it fails to conform to the matching principle and often yields an inaccurate depiction of a firm’s performance.

Thus, Option B is incorrect as both accrual and cash basis of accounting involve the recording of all transactions, but with differences in the time of recognition of revenues and expenses. Option C is also wrong since accrual accounting is applicable according to GAAP for most corporations though some small-scale businesses and specific industries.