Which of the following accounting methods records income when it is collected and expenses when they are paid?

• A. cash basis
• B. accrual basis
• C. modified cash basis
• D. modified accrual basis

Answer: (A)

Timing of revenue and expense recognition is the key idea. The scenario describes recording income only when cash is actually collected and recording expenses only when cash is paid. That is cash basis accounting: income is recognized when cash comes in, and expenses are recognized when cash goes out, with no receivables or payables tracked. In contrast, accrual accounting records revenue when it is earned (even if cash isn’t yet received) and expenses when they are incurred (even if payment hasn’t been made). The modified cash basis and modified accrual basis are hybrids used in specific contexts and do not consistently follow the “income when collected, expenses when paid” rule across all transactions, so they don’t fit the description as cleanly.