Chapter 3, Problem 1QC

To determine

Types of Accounting:

There are two types of accounting which are followed by businesses:

a. Accrual basis: When books of account are recorded basis on an estimation or anticipation of any expense it is known as accrual basis. This concept requires to account for an expense or an income as and when its accrued by following the prudence principle of accounting.

b. Cash Basis: When books of accounts are recorded on the basis of actual cash receipt or payment. This method requires that the transactions should only be recorded when the cash has been received or is been expensed then only it should be accounted in the books.

To identify:

The Correct statement about accrual and cash basis of accounting

Answer to Problem 1QC

Solution:

a. Accrual accounting records the revenue only when it is earned.

Explanation of Solution

Explanations:

• Accrual accounting records revenue only when it is earned: The principle of accrual accounting is that revenue is recognized when earned, and expenses are recognized when incurred hence the option given is correct.

• Accrual accounting is not allowed under GAAP: Accrual accounting is an important part of GAAP and it is allowed under GAAP therefore this option is incorrect.

• Cash basis accounting records all transactions: Cash basis of accounting does not records all the transactions it only records all the cash transaction. Therefore this option is also wrong.

• All options are true: Since option b and c are not correct therefore all options are not true.

Conclusion

From the given information and according to the calculation only option “a” is correct as accrual accounting records the revenue when it is earned and all other given options are wrong.