The accrual basis of accounting

E

Accrual accounting principles are the decision rules that state when to recognize the revenue and expense consequences of cash flows and other events.

The accrual basis of accounting refers to a method of recording and reporting financial transactions that focuses on matching revenues with expenses in the appropriate accounting period, regardless of when cash is received or paid. It is based on the principle of accrual accounting, which recognizes economic events and transactions as they occur, rather than solely when cash is exchanged.

Now let's analyze each answer choice to determine the correct explanation:

A. is used only for tax reporting purposes. This statement is incorrect. The accrual basis of accounting is used for financial reporting purposes, not just for tax reporting. Tax reporting may have its own specific rules and requirements, which can differ from the accrual basis.

B. recognizes the development of assets and liabilities externally. This statement is not an accurate description of the accrual basis of accounting. The accrual basis focuses on recognizing revenue when it is earned (regardless of whether it has been received) and recognizing expenses when they are incurred (regardless of whether they have been paid). It does not specifically pertain to the development of assets and liabilities externally.

C. does not pertain to revenue recognition-only expense recognition. This statement is incorrect. The accrual basis of accounting pertains to both revenue recognition and expense recognition. It ensures that revenue is recognized in the accounting period in which it is earned, regardless of when the cash is received. Similarly, expenses are recognized in the period in which they are incurred, irrespective of when the cash is paid.

D. begins with the cash basis of accounting and proceeds to make the necessary adjustments. This statement is incorrect. The accrual basis of accounting is distinct from the cash basis of accounting. The cash basis records transactions when cash is received or paid, while the accrual basis records transactions when they occur, regardless of cash movements. Adjustments are made in accrual accounting to recognize revenue and expenses that have been earned or incurred but have not yet been recorded.

E. allocates many transactions that produce cash flows to time periods other than those in which the cash flows occur. This statement accurately describes the accrual basis of accounting. Under the accrual basis, many transactions are allocated to time periods other than those in which the associated cash flows occur. This is because the focus is on recognizing revenue and expenses based on when they are earned or incurred, rather than when cash is received or paid.

In conclusion, the correct answer is E. The accrual basis of accounting allocates many transactions that produce cash flows to time periods other than those in which the cash flows occur.