Which statement is true about cash-basis accounting?

Which statement is true about cash-basis accounting?

• A. Revenue is recognized when cash is received; expenses when cash is paid.
• B. Revenue is recognized when earned and expenses when incurred.
• C. Revenue is recognized when earned and cash is received.
• D. Revenue and expenses are recognized when billed.

Answer: (A)

In cash-basis accounting, you record money only when cash actually moves. Revenue is recognized at the moment cash is received from customers, and expenses are recognized when cash is paid. This direct link to cash flow is what defines cash-basis practice, making the statement that revenue is recognized when cash is received and expenses when cash is paid true. By contrast, accrual accounting records revenue when it’s earned and expenses when they’re incurred, regardless of when cash changes hands. The other options describe timing rules that don’t align with cash-basis principles, such as recognizing revenue when earned (even if cash hasn’t arrived) or recognizing both revenue and expenses when billed, which ties more to accrual concepts than to cash basis.

In cash-basis accounting, you record money only when cash actually moves. Revenue is recognized at the moment cash is received from customers, and expenses are recognized when cash is paid. This direct link to cash flow is what defines cash-basis practice, making the statement that revenue is recognized when cash is received and expenses when cash is paid true.

By contrast, accrual accounting records revenue when it’s earned and expenses when they’re incurred, regardless of when cash changes hands. The other options describe timing rules that don’t align with cash-basis principles, such as recognizing revenue when earned (even if cash hasn’t arrived) or recognizing both revenue and expenses when billed, which ties more to accrual concepts than to cash basis.