What is one key difference between cash basis and accrual basis accounting?

What is one key difference between cash basis and accrual basis accounting?

• A. Cash basis recognizes revenue when earned; accrual basis recognizes revenue when cash is received
• B. Cash basis recognizes revenue when cash is received; accrual basis recognizes revenue when earned
• C. Cash basis includes fixed assets; accrual basis excludes fixed assets
• D. Cash basis pertains to tax accounting; accrual basis pertains to managerial accounting

Answer: (B)

The correct answer highlights a fundamental aspect of accounting methods: cash basis and accrual basis differ primarily in their timing of revenue recognition. Under cash basis accounting, revenue is recognized only when cash is actually received, meaning that transactions are recorded based on the physical exchange of cash rather than when the goods or services are provided. This method is often simpler and more straightforward, making it appealing for small businesses or individuals who monitor cash flow closely. On the other hand, accrual basis accounting recognizes revenue when it is earned, regardless of when cash is received. This means revenue is recorded at the moment the service is performed or the product is delivered, aligning with the principle of matching revenue with expenses incurred in earning that revenue. This approach provides a more accurate reflection of a company's financial position and performance over a period, supporting better decision-making. The distinction is essential for understanding financial reporting and management, as it affects how financial statements are prepared and how a business's financial health is evaluated over time.

The correct answer highlights a fundamental aspect of accounting methods: cash basis and accrual basis differ primarily in their timing of revenue recognition. Under cash basis accounting, revenue is recognized only when cash is actually received, meaning that transactions are recorded based on the physical exchange of cash rather than when the goods or services are provided. This method is often simpler and more straightforward, making it appealing for small businesses or individuals who monitor cash flow closely.

On the other hand, accrual basis accounting recognizes revenue when it is earned, regardless of when cash is received. This means revenue is recorded at the moment the service is performed or the product is delivered, aligning with the principle of matching revenue with expenses incurred in earning that revenue. This approach provides a more accurate reflection of a company's financial position and performance over a period, supporting better decision-making.

The distinction is essential for understanding financial reporting and management, as it affects how financial statements are prepared and how a business's financial health is evaluated over time.