Which basis of accounting recognizes revenue when earned and expenses when incurred?

• A. Cash basis accounting
• B. Tax basis
• C. Accrual basis accounting
• D. Hybrid basis

Answer: (C)

Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. This means revenue is recognized at the point the goods are delivered or the service is performed, not when the customer pays. Similarly, expenses are recognized in the period the cost is incurred or the obligation is created, not when you pay the bill. This approach aligns income with the costs that helped generate it, providing a more accurate picture of profitability and financial position.

For example, if you perform a service in one month but receive payment the next month, revenue is recorded in the month the service was completed. If you use utilities in a month and pay the bill later, the expense is recorded in that month as well. In contrast, cash basis would wait to record revenue until cash is received and expenses until cash is paid, which can distort timing of income and costs. Hybrid and tax-basis methods mix timing rules but are not the standard for external financial reporting.