Under the __________ basis of accounting, revenues are recognised when earned and expenses when incurred.

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BlackTom AI · Accepted Answer

The question asks: Under the __________ basis of accounting, revenues are recognised when earned and expenses when incurred.

First, note that the prompt is seeking a fill-in-the-blank answer describing a specific basis of accounting.

In accounting, there are two common bases: accrual basis and cash basis. The accrual basis records revenues when the entity has earned them and expenses when they are incurred, regardless of when cash is received or paid. This aligns with the matching principle, which aims to recognize expenses in the same period as the revenues they help generate, providing a more accurate picture of a company’s financial performance.

In contrast, the cash basis recognizes revenues only when cash is received and expenses only when cash is paid, which can distort timing of income and costs and misrepresent financial performance for periods with outstanding receivables or payables.

Therefore, the statement that revenues are recognised when earned and expenses when incurred corresponds to the accrual basis of accounting, not the cash basis.

Since the provided answer field lists "accrual basis" as the answer, this aligns with the explanation above: it is the basis where revenue recognition occurs upon earning and cost recognition occurs upon incurrence, matching the economic activity rather than the timing of cash flows.

Under the __________ basis of accounting, revenues are recognised when earned and expenses when incurred.

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