Under Cash-Basis accounting, when would a business recognize its expenses?

Under Cash-Basis accounting, when would a business recognize its expenses?

• A. When the expense is incurred.
• B. When the expense is paid out.
• C. When the expense is billed in the mail.
• D. When the revenue is earned.

Answer: (B)

In cash-basis accounting, expenses are recognized when cash is actually paid out. This means the act of disbursing money records the expense, not the moment it’s incurred or billed. So when you pay a bill, that’s when the expense appears in the books. Why the other ideas don’t fit: recognizing an expense when it’s incurred is the hallmark of accrual accounting, not cash-basis. A bill arriving in the mail doesn’t by itself create an expense until you pay it. And recognizing expenses when revenue is earned would mix expense timing with revenue timing, which isn’t how cash-basis accounts are set up.

In cash-basis accounting, expenses are recognized when cash is actually paid out. This means the act of disbursing money records the expense, not the moment it’s incurred or billed. So when you pay a bill, that’s when the expense appears in the books.

Why the other ideas don’t fit: recognizing an expense when it’s incurred is the hallmark of accrual accounting, not cash-basis. A bill arriving in the mail doesn’t by itself create an expense until you pay it. And recognizing expenses when revenue is earned would mix expense timing with revenue timing, which isn’t how cash-basis accounts are set up.