Which accounting basis records income when earned and expenses when incurred?

• A. Cash basis
• B. Journal
• C. Accrual basis
• D. Journalizing

Answer: (C)

Recording income when earned and expenses when incurred is the accrual basis of accounting. This method follows the revenue recognition principle (you record revenue when you satisfy a performance obligation) and the matching principle (you align related expenses with the revenues they help generate in the same period). It provides a more accurate picture of profitability because timing of cash flows doesn’t distort when revenue and costs are recognized. In contrast, the cash basis records revenue only when cash is received and expenses only when cash is paid, which can misrepresent performance if cash flows lag behind or precede the earning activity. A journal is simply the book of original entry used to record transactions, and journalizing is the act of recording them—neither defines when income or expenses are recognized.