Accounting & auditingLesson 1 of 5 in the course Accrual Accounting Process

Cash- and Accrual-Basis Accounting: Timing, Recognition, and Uses

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Cash-basis accounting records a transaction in the financial statements when cash is received or paid. In other words, the method follows cash inflows and outflows rather than recording activity when a business earns revenue or incurs an expense.

This can make the method straightforward to track: the business focuses on cash movements as they happen. However, the timing of a cash receipt or payment may differ from the timing of the underlying goods or services.

All flashcards

What is cash-basis accounting?
An accounting method that records transactions when cash is received or paid.
What is accrual-basis accounting?
An accounting method that records revenue when earned and expenses when incurred, regardless of cash timing.
What does the revenue recognition principle determine?
The accounting period in which earned revenue is recorded.
What is the matching principle?
The principle of recording expenses in the period associated with the revenues they help generate.
What is one limitation of cash-basis accounting?
Cash receipts and payments may fall in a different period from when revenue is earned or expenses are incurred.

Quiz questions

  1. A consulting firm completes a service in March and receives payment in April. Under accrual accounting, when is the revenue recorded?Answer: In March, when the service is earned.
  2. A business incurs an expense in June but pays the bill in July. Under accrual accounting, when is the expense recorded?Answer: In June, when the expense is incurred.
  3. A business receives $1,400 and pays $1,150 in cash expenses during August. What is its cash-basis net income for August?Answer: $250.
  4. Why can accrual accounting help investors and lenders compare businesses?Answer: It presents activity in the periods when revenue is earned and expenses are incurred.
  5. Which basis do financial statements prepared under applicable GAAP or IFRS standards use?Answer: Accrual-basis accounting.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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