Which statement best contrasts accrual basis and cash basis accounting for revenue and expenses?

• A. Under accrual basis, revenue is recognized when earned and expenses are recognized when incurred; under cash basis, revenue and expenses are recognized only when cash is received or paid.
• B. Revenue is recognized when cash is received under accrual accounting.
• C. Expenses are recognized when cash is paid under accrual accounting.
• D. Under cash basis, revenue is recognized when earned and expenses are incurred.

Answer: (D)

Understanding when revenues and expenses are recorded hinges on the timing of recognition in each method. In accrual accounting, revenue is recognized when it is earned—when you have delivered the goods or performed the service—and expenses are recognized when they are incurred, matching them to the revenues they helped generate, even if cash hasn’t changed hands yet. In cash accounting, revenue is recognized only when cash is actually received, and expenses are recognized only when cash is paid, regardless of when the sale occurred or the obligation was incurred. The statement that cash basis recognizes revenue when earned and expenses when incurred describes accrual accounting, not cash accounting. The correct contrast is: accrual records revenue when earned and expenses when incurred; cash records revenue when cash is received and expenses when cash is paid.