- A. Expenses are recognized when the cash leaves the bank account.
- B. Revenue is recognized when a customer places an order.
- C. Includes accounts receivable and accounts payable.
- D. Revenue is recognized when earned.
Correct Answers:
C. Includes accounts receivable and accounts payable.
D. Revenue is recognized when earned.
Explanation:
The accrual-based method of accounting is used to record revenues and expenses when they are earned or incurred, regardless of when the cash transaction occurs. Here’s why the answers are correct:
- C. Includes accounts receivable and accounts payable:
- Under the accrual method, accounts receivable (money owed to the business) and accounts payable (money the business owes to others) are essential components of the accounting records. This ensures that financial transactions are recorded when they occur, not when cash is exchanged.
- D. Revenue is recognized when earned:
- In accrual accounting, revenue is recognized when it is earned (e.g., when the service is provided or goods are delivered), not necessarily when payment is received. This aligns with the revenue recognition principle.
Why the other options are incorrect:
- A. Expenses are recognized when the cash leaves the bank account:
- This is characteristic of the cash-basis method of accounting, not accrual accounting. Under accrual accounting, expenses are recorded when they are incurred, not when cash is paid.
- B. Revenue is recognized when a customer places an order:
- Revenue is not recognized simply when a customer places an order. Revenue is typically recognized when the service or product is provided, not at the time of the order.
