What is the difference between cash and accrual accounting?

What is the difference between cash and accrual accounting?

• A. Cash accounting records transactions when cash changes hands
• B. Cash accounting records transactions when revenue is earned
• C. Cash accounting records transactions when expenses are paid
• D. Cash accounting records transactions when assets are purchased

Answer: (A)

Cash accounting records transactions when cash changes hands. In this system, revenue is recognized only when cash is received, and expenses are recognized only when cash is paid. That contrasts with accrual accounting, which records revenue when it is earned and expenses when they are incurred, regardless of when cash actually moves. For example, a service performed in December but paid for in January would be recognized as December revenue in accrual accounting, but in cash accounting it would be recorded in January when the cash is received. Similarly, if an invoice is received in December but paid in January, accrual accounting records the expense in December, while cash accounting records it in January. Cash basis highlights real cash flow and is simpler, while accrual provides a fuller picture of profitability by matching revenues and expenses to the periods in which they occur.

Cash accounting records transactions when cash changes hands. In this system, revenue is recognized only when cash is received, and expenses are recognized only when cash is paid. That contrasts with accrual accounting, which records revenue when it is earned and expenses when they are incurred, regardless of when cash actually moves. For example, a service performed in December but paid for in January would be recognized as December revenue in accrual accounting, but in cash accounting it would be recorded in January when the cash is received. Similarly, if an invoice is received in December but paid in January, accrual accounting records the expense in December, while cash accounting records it in January. Cash basis highlights real cash flow and is simpler, while accrual provides a fuller picture of profitability by matching revenues and expenses to the periods in which they occur.