What is cash basis accounting?

• A. Revenues and expenses are recorded when cash is received or paid
• B. Revenues and expenses are recognized in the period service is performed
• C. Transactions are recorded when goods are purchased
• D. Tax rules determine recognition

Answer: (A)

Cash basis accounting records revenues and expenses when cash actually changes hands—revenues when cash is received and expenses when cash is paid. This approach mirrors the company’s real cash flow and is simpler than accrual accounting, which recognizes revenue when earned and expenses when incurred, regardless of cash movement. For example, a service performed in December but paid for in January would be recorded as revenue in January under cash basis. Similarly, if you purchase supplies in December but pay in January, the expense is recognized in January. The other descriptions describe timing under accrual accounting or rely on external rules, not the fundamental cash-triggered timing of cash basis.