Which method will allow you to book lower expenses, over longer periods of time?

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Question: Which method will allow you to book lower expenses, over longer periods of time?

Option 1: Accrual Method. Think about how the accrual basis handles timing of costs. Under accrual, expenses are recorded when the obligation is incurred or the benefit is consumed, and when related revenues are earned, expenses can be matched to those periods. When you have costs that are long-term or benefit multiple periods, you can capitalize or allocate them over the useful life (depreciation, amortization, capitalization). This spreading reduces peak expense in any single period, effectively allowing the costs to be reflected across multiple periods rather than all at once.

Option 2: Cash Method. In the cash basis, expenses are recorded only when cash leaves the business. This creates a more immediate recognition of cost when you actually pay, which can result in higher expenses in the period you pay and lower expenses later, but it doesn’t inherently spread or defer costs across periods on an accounting basis. The timing is driven purely by cash flows, not by matching with benefits or revenue.

Why the Accrual Method can lead to lower, long-term expense recognition, compared to cash: with accrual, long-lived assets and prepaid items can be amortized or depreciated over their useful life, distributing the expense, whereas cash accounting tends to show costs when paid, potentially concentrating expense in one period.

Why the Cash Method is less favorable for spreading costs: cash accounting records the full cost in the period of payment, which may create higher expenses upfront or in a particular period, without the built-in spreading mechanism that depreciation or capitalization provides.

In summary, the accrual approach explicitly supports distributing costs over multiple periods through capitalization and depreciation mechanisms, whereas the cash method ties expense timing directly to cash movements, lacking automatic spreading across periods.

ORLJ4002001 Exam 1: Accounting

Which method will allow you to book lower expenses, over longer periods of time?

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