Which of the following correctly defines withholding in accounting?

• A. The recording of revenue when cash is received, regardless of when it is earned.
• B. The process by which an employer deducts a portion of an employee's wages to pay directly to the government for taxes owed.
• C. The allocation of costs to different departments within an organization.
• D. The estimation of future expenses for budgeting purposes.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the term 'withholding' in accounting. Withholding refers to the process where an employer deducts a portion of an employee's wages or salary to pay directly to the government for taxes owed. This is typically done for income tax purposes.
2. Step 2: Analyze the options provided in the problem. The first option refers to revenue recognition based on cash receipt, which is unrelated to withholding. The third option discusses cost allocation, which is a different accounting concept. The fourth option mentions budgeting, which is also unrelated to withholding.
3. Step 3: Identify the correct definition of withholding from the options. The second option correctly defines withholding as the process by which an employer deducts a portion of an employee's wages to pay directly to the government for taxes owed.
4. Step 4: Relate the concept of withholding to its practical application. Employers are required by law to withhold taxes from employees' paychecks and remit them to the government. This ensures that employees meet their tax obligations.
5. Step 5: Conclude that withholding is a critical part of payroll accounting and tax compliance, ensuring that taxes are collected efficiently and accurately.