It is actually a method of preparing financial statements in which only transactions involving actual cash outlays are recorded.
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A. B. C. D.A
The correct answer is A. Cash basis.
The cash basis is a method of preparing financial statements that focuses on recording transactions based on actual cash inflows and outflows. Under the cash basis, only transactions that involve actual cash payments or receipts are recognized and recorded in the financial statements.
In this method, revenue is recognized when cash is received from customers, and expenses are recognized when cash is paid to suppliers or other parties. It does not take into account any credit transactions or transactions that have not resulted in a cash flow.
The cash basis is relatively simple and straightforward to use, making it suitable for small businesses and individuals who do not have complex financial transactions. It provides a clear picture of the cash position and cash flow of an entity.
However, the cash basis has limitations. It may not accurately reflect the overall financial performance and position of an entity since it does not consider non-cash transactions such as accounts receivable, accounts payable, or accrued expenses. It also does not account for revenue or expenses that have been earned or incurred but not yet received or paid in cash.
In contrast, the accrual basis of accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when the actual cash is received or paid. This method provides a more comprehensive view of an entity's financial performance and position by considering both cash and non-cash transactions.
In summary, the cash basis is a method of preparing financial statements that records only transactions involving actual cash outlays. While it is straightforward and useful for certain situations, it does not provide a complete picture of an entity's financial performance and position.