Chapter 3, Problem 1QC

Which of the following is true of accrual basis accounting and cash basis accounting?

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

b. Accrual accounting is not all owed under GAAP.

c. Cash basis accounting records all transaction s.

d. All of the above are true.

To determine

Cash basis accounting:

According to cash-basis accounting, revenues and expenses are recorded when there is an exchange of cash.

Accrual basis accounting:

According to this basis of accounting, revenue should be recognized at the time when it is earned, it doesn’t matter that cash is received or not and expense should be recognized when it is incurred, it doesn’t matter that cash is paid or not.

To identify: The given statement which is true of accrual basis accounting and cash basis accounting.

Answer to Problem 1QC

“Option a” of accrual accounting records revenue only when it is earned is true of accrual basis accounting.

Explanation of Solution

Justification for incorrect answers:

Option b – is incorrect, because only accrual basis accounting is allowed by GAAP (Generally Accepted Accounting Principle), but not cash basis accounting.

Option c – is incorrect, because all transactions are not recorded under cash basis accounting, only transactions related to cash receipts and payments are recorded under cash basis accounting.

Option d – is incorrect, because all of the given options are not true.

Justification for correct answer:

Option a – is correct, as revenues would be recorded only when it is earned as per accrual accounting principle.