What is the difference between accrual basis and cash basis accounting?

What is the difference between accrual basis and cash basis accounting?

• A. Accrual recognizes revenues and expenses when earned/incurred; cash basis recognizes when cash is exchanged.
• B. Accrual recognizes cash only; cash basis recognizes revenue when earned.
• C. Accrual and cash basis are identical in timing.
• D. Accrual recognizes taxes only.

Answer: (A)

The difference being tested is when income and costs are recorded relative to cash flow. In accrual accounting, you recognize revenue when you’ve earned it and expenses when they’re incurred, regardless of when cash actually changes hands. This mirrors the economic activity and obligations in the period, giving a fuller view of performance and financial position. In contrast, cash basis accounting records revenue only when cash is received and expenses only when cash is paid, so the timing follows actual cash movements rather than when the sale occurs or the service is consumed. That’s why the statement describing accrual as recognizing revenues and expenses when earned or incurred, while cash basis recognizes them when cash is exchanged, is the best description. The other options mix up timing, implying cash events drive accrual or claiming the two methods are identical, or that accrual is about taxes only, which isn’t correct.

The difference being tested is when income and costs are recorded relative to cash flow. In accrual accounting, you recognize revenue when you’ve earned it and expenses when they’re incurred, regardless of when cash actually changes hands. This mirrors the economic activity and obligations in the period, giving a fuller view of performance and financial position. In contrast, cash basis accounting records revenue only when cash is received and expenses only when cash is paid, so the timing follows actual cash movements rather than when the sale occurs or the service is consumed.

That’s why the statement describing accrual as recognizing revenues and expenses when earned or incurred, while cash basis recognizes them when cash is exchanged, is the best description. The other options mix up timing, implying cash events drive accrual or claiming the two methods are identical, or that accrual is about taxes only, which isn’t correct.