What accounting system records revenue when received and capitalizes fixed assets?

• A. Modified cash basis of accounting
• B. Accrual basis of accounting
• C. Cash basis accounting
• D. Hybrid basis

Answer: (A)

This tests understanding of the modified cash basis of accounting. Under this approach, revenue is recognized when cash is actually received, and long-term assets like fixed assets are capitalized on the balance sheet and depreciated over time rather than expensed immediately. It blends cash-based timing for revenue with accrual treatment for fixed assets, giving you revenue timing based on cash receipts while still presenting fixed assets as assets that are depreciated.

Cash basis would record revenue only when cash comes in and would typically expense asset purchases, so it doesn’t capitalize fixed assets. Accrual basis would recognize revenue when earned (not necessarily when cash is received) and would capitalize fixed assets. A hybrid can describe various mixtures, but the specific combination described—revenue on cash receipt plus asset capitalization—is characteristic of the modified cash basis.