How do you prepare an income statement under accrual basis?

How do you prepare an income statement under accrual basis?

• A. Under accrual basis, recognize revenues when earned and expenses when incurred, regardless of when cash is received or paid, and report accordingly on the income statement.
• B. Recognize revenues when cash is received.
• C. Recognize expenses when cash is paid.
• D. All revenues and expenses are recorded at year-end.

Answer: (A)

Under accrual accounting, the income statement for a period shows the results by recognizing revenues when earned and expenses when incurred, regardless of when cash is received or paid. This follows the matching principle: revenues recorded in the period should be matched with the expenses incurred to generate them in that same period. You might record revenue when a sale is made or service delivered even if cash arrives later, and you record an expense when the obligation or benefit is incurred, not when you pay. This approach, which aligns with GAAP, provides a true picture of profitability for the period. The other options rely on cash flows—revenue when cash is received or expense when cash is paid—or suggest waiting until year-end, which would distort timing and misrepresent the period’s performance.

Under accrual accounting, the income statement for a period shows the results by recognizing revenues when earned and expenses when incurred, regardless of when cash is received or paid. This follows the matching principle: revenues recorded in the period should be matched with the expenses incurred to generate them in that same period. You might record revenue when a sale is made or service delivered even if cash arrives later, and you record an expense when the obligation or benefit is incurred, not when you pay. This approach, which aligns with GAAP, provides a true picture of profitability for the period. The other options rely on cash flows—revenue when cash is received or expense when cash is paid—or suggest waiting until year-end, which would distort timing and misrepresent the period’s performance.