Question

How are revenues and expenses reported on the income statement under (a) the cash basis of accounting and (b) the accrual basis of accounting

Answer 1

Answer:

(a) Under Cash Basis of accounting

Revenues and expenses are recorded either when payment is made or payment is received. It relates to accounting receipts and payments. The drawback of this approach being, it ignores accounting period as it places relevance on actual receipts and payments.

(b) Under Accrual Basis of Accounting

Under accrual basis, a transaction is recorded when income is earned and when expenditure is incurred and not when actual cash for the same has been received and paid for.

Accrual system of accounting is more prudent form of accounting and ensures transactions relating to a period are recorded and accounted for in that particular period.