Bad debts expense is not recognized in cash basis accountingGroup of answer choicesTrueFalse

Answer

The statement is True.

Explanation

In cash basis accounting, revenue is recognized when cash is received, and expenses are recognized when cash is paid. This means that any expenses incurred that do not involve an outflow of cash at the time the sale was made — such as bad debts — are not recorded. Bad debts occur when a customer owes money but is unable to pay it back. Since the cash basis method does not account for accounts receivable until the cash is actually collected, it does not recognize bad debts as expenses. Therefore, any lost revenue from bad debts cannot be expensed until the actual cash flow reflects that loss. In contrast, under accrual accounting, bad debts would be recognized as an expense in the period in which the revenue is recorded, reflecting a more accurate financial picture of the company’s performance.