Questions: 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 allowed under GAAP. C. Cash basis accounting records all transactions. D. All of the above are true.

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 allowed under GAAP.
C. Cash basis accounting records all transactions.
D. All of the above are true.
Transcript text: 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 allowed under GAAP. C. Cash basis accounting records all transactions. D. All of the above are true.
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Solution

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The answer is the first one (A): Accrual accounting records revenue only when it is earned.

Explanation for each option:

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

  • This statement is true. Under accrual basis accounting, revenues are recorded when they are earned, regardless of when the cash is received. This method aligns with the matching principle, which is a fundamental concept in accounting.

B. Accrual accounting is not allowed under GAAP.

  • This statement is incorrect. Accrual accounting is required under Generally Accepted Accounting Principles (GAAP) for most businesses because it provides a more accurate picture of a company's financial position and performance.

C. Cash basis accounting records all transactions.

  • This statement is incorrect. Cash basis accounting records transactions only when cash changes hands. It does not record transactions when they are incurred if no cash is exchanged at that time.

D. All of the above are true.

  • This statement is incorrect because options B and C are not true.

In summary, the correct statement is A: Accrual accounting records revenue only when it is earned.

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