Which two accounting methods are most commonly used?

• A. Double-entry and single-entry
• B. Accrual accounting and cash accounting
• C. FIFO and LIFO
• D. Tax accounting

Answer: (B)

Two common ways to recognize income and expenses in financial reporting are accrual basis and cash basis. Accrual accounting records revenue when it’s earned and expenses when they’re incurred, regardless of when cash actually changes hands. This approach reflects the business activity for the period and provides a more accurate picture of profitability over time. Cash accounting, on the other hand, records transactions only when cash is received or paid, so it tracks actual cash flow rather than performance over a period.

Accrual is generally the standard for external financial statements and is required for most sizable or publicly reporting entities, while cash basis is simpler and is often used by smaller businesses or for certain tax purposes. The other options describe different ideas: double-entry versus single-entry relates to the structure of the recording system, not the timing of recognizing revenue and expenses; FIFO and LIFO are inventory valuation methods; tax accounting refers to rules for tax reporting, not the general method used for financial statements.