Question

Under the accrual basis of accounting, costs used to generate revenue are recorded as expenses

A. in the same period as related revenue.

B. in the period incurred.

C. in the period cash is paid.

Answer 1

Under the accrual basis of accounting, cost used to generate revenue are recorded as expenses in the same period as related revenue.

Same as revenue, the recording of the expense has no relation with the payment of cash.As per the matching principle of accounting, revenue should be matched with expenses incurred to generate revenue.

The important point is include only revenue earned during the period and only expenses incurred to produce the revenue. The payment of cash is not required for recognizing an expense.

However, in cash basis of accounting,expense should be recorded when cash is actually paid irrespective of whether the expense was actually incurred or not.

For eg : A company purchased a machinery and it has a useful life of 5 years. So it would generate revenue for the company for 5 years. So the expenses incurred for purchase should be distributed by charging depreciation each year rather than charging the whole price at the year of purchase.