Cash basis of accounting is described as:

• A. Records revenue when earned and expenses when incurred.
• B. Records revenue when collected and expenses when paid; simple but may not reflect true financial condition.
• C. It is GAAP-compliant.
• D. It always provides a complete picture of cash flow.

Answer: (B)

Cash basis accounting records revenue when cash is collected and expenses when cash is paid. This makes the method simple, because you’re only tracking actual cash movements and not receivables or payables. However, it may not reflect the true financial condition since income can be recognized only when cash comes in and expenses only when cash goes out, ignoring amounts owed to you or due to others. This can distort profitability and liquidity timing. It’s also not GAAP-compliant for most formal financial reporting, because GAAP uses accrual accounting to match revenues with the period in which they’re earned and expenses with the period in which they’re incurred, regardless of cash flow. So describing cash basis as simple and cash-focused, but potentially misleading about overall financial health, captures why it’s typically described that way.