Under GAAP, which accounting basis is required?

• A. Cash basis
• B. Accrual basis
• C. Modified accrual
• D. Tax basis

Answer: (B)

GAAP requires recognizing revenues when earned and expenses when incurred, using the accrual basis, because this approach provides a faithful representation of a company’s financial performance and position over the period. The accrual basis aligns with the matching principle and revenue recognition standards, giving a more accurate picture of ongoing operations than cash accounting, which can distort timing. Cash basis records only when cash changes hands, which can delay or accelerate the appearance of income and costs. Modified accrual is used in government accounting, not in standard GAAP financial statements for typical entities, and tax basis accounting is designed for tax reporting, not for GAAP purposes.