Which statement correctly describes accrual basis accounting vs cash basis for revenue recognition?

Which statement correctly describes accrual basis accounting vs cash basis for revenue recognition?

• A. Accrual basis recognizes revenue when cash is received, and cash basis recognizes revenue when service is performed.
• B. Accrual basis recognizes revenue when cash is paid, and cash basis recognizes revenue when cash is received.
• C. Both bases recognize revenue only when cash is received.
• D. Accrual basis recognizes revenue when earned, and cash basis recognizes revenue when cash is received.

Answer: (D)

The key idea is how revenue timing is determined in two systems. In accrual accounting, revenue is recorded when it is earned—when the seller has performed the service or delivered the goods and has the right to payment—regardless of when cash is actually received. In cash accounting, revenue is recorded only when cash is received. So the statement that matches this distinction—revenue recognized when earned under accrual, and when cash is received under cash basis—is the correct one. The other descriptions mix up the timing (for example, recognizing accrual revenue when cash is received, or treating accrual as tied to when cash is paid), which does not align with how these methods record revenue.

The key idea is how revenue timing is determined in two systems. In accrual accounting, revenue is recorded when it is earned—when the seller has performed the service or delivered the goods and has the right to payment—regardless of when cash is actually received. In cash accounting, revenue is recorded only when cash is received.

So the statement that matches this distinction—revenue recognized when earned under accrual, and when cash is received under cash basis—is the correct one. The other descriptions mix up the timing (for example, recognizing accrual revenue when cash is received, or treating accrual as tied to when cash is paid), which does not align with how these methods record revenue.