Question

Which of the following describes a system of reporting revenues and expenses in the period in which they are considered to have been earned or incurred, regardless of the actual time of collection or payment? A) Actual amonut b) Asset amount c)accrual basis accounting D) none of these

Answer 1

Answer:

c)accrual basis accounting

Explanation:

Accruals basis accounting (accruals accounting, the matching concept) depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts or payments occur in a different period.

In accrual basis accounting:

Revenue from sales and other income should be reported in the period when the income arises (which might not be the same as the period when the cash is received from the customer / client).

The cost of sales in the statement of comprehensive income must be matched with the sales. Income and ‘matching’ expenses must be reported in the same financial period. In other words, when the revenue is recognised from sale then the cost must also be recognised in the similar accounting period.

Other expenses should be charged in the period to which they relate, not the period in which they are paid for.

So based on the above discussion, the answer is c)accrual basis accounting