According to which basis of accounting, Revenues and costs are recognised in the period in which they occur rather when they are paid?

Accrual basis of accounting

The correct answer is option 2- Accrual basis of accounting.

Under the accrual basis, however, revenues and costs are recognised in the period in which they occur rather when they are paid. A distinction is made between the receipt of cash and the right to receive cash and payment of cash and legal obligation to pay cash. Thus, under this system, the monetary effect of a transaction is taken into account in the period in which they are earned rather than in the period in which cash is actually received or paid by the enterprise. This is a more appropriate basis for the calculation of profits as expenses are matched against revenue earned in relation thereto. For example, raw materials consumed are matched against the cost of goods sold.