The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:
A) Cash basis accounting.
B) The matching principle.
C) The time period assumption.
D) Accrual basis accounting.
E) Revenue basis accounting.

Question

Quizplus · Accepted Answer

The approach of recognizing revenues when they are earned and matching expenses to those revenues is known as the accrual basis of accounting. This is in contrast to the cash basis of accounting (option A), which only recognizes revenues and expenses when cash is received or paid out, respectively. The matching principle (option B) is a key principle of accrual accounting which requires that expenses be recognized in the same period as the revenues they helped to generate, allowing for a more accurate determination of profitability. The time period assumption (option C) is also a key principle of accounting, which assumes that an organization's financial activities can be divided into discrete time periods for reporting purposes. Revenue basis accounting (option E) is not a well-known approach in accounting and is unlikely to be the correct answer.

The Approach to Preparing Financial Statements Based on Recognizing Revenues