What defines cash basis accounting?

What defines cash basis accounting?

• A. Revenue is recorded when earned, regardless of payment
• B. Expenses are recorded when incurred, regardless of payment
• C. Revenue and expenses are recorded upon receipt and payment
• D. It focuses only on long-term investments

Answer: (C)

Cash basis accounting is defined by the principle that revenue is recognized when cash is received, and expenses are recognized when cash is paid. This means that income is recorded at the time you actually receive payment, rather than when a service is performed or goods are delivered. Similarly, expenses are noted when the payment for those expenses is made, not when the expense is incurred. This approach is simpler and more straightforward than accrual accounting, which records revenues and expenses when they are earned or incurred, regardless of cash transactions. The focus on immediate cash transactions makes cash basis accounting beneficial for small businesses or individuals who wish to manage their cash flow effectively without the complexities of accounting for future obligations or receivables.

Cash basis accounting is defined by the principle that revenue is recognized when cash is received, and expenses are recognized when cash is paid. This means that income is recorded at the time you actually receive payment, rather than when a service is performed or goods are delivered. Similarly, expenses are noted when the payment for those expenses is made, not when the expense is incurred. This approach is simpler and more straightforward than accrual accounting, which records revenues and expenses when they are earned or incurred, regardless of cash transactions.

The focus on immediate cash transactions makes cash basis accounting beneficial for small businesses or individuals who wish to manage their cash flow effectively without the complexities of accounting for future obligations or receivables.