Which statement correctly distinguishes cash accounting from accrual accounting?

Which statement correctly distinguishes cash accounting from accrual accounting?

• A. Cash accounting records revenue and expenses when cash changes hands; accrual records revenue when earned and expenses when incurred
• B. Cash accounting records revenue when earned; accrual records revenue when cash is received
• C. Cash accounting and accrual accounting are the same
• D. Cash accounting records all financial activity; accrual records only cash transactions

Answer: (A)

This tests the timing of recognizing revenue and expenses in two common methods. Cash accounting records revenue and expenses only when cash actually changes hands, reflecting actual cash flow. Accrual accounting records revenue when it has been earned (the work is done or goods are delivered) and records expenses when they are incurred (the obligation arises), regardless of when cash is paid. So the correct description is that cash records revenue and expenses when cash changes hands, while accrual records revenue when earned and expenses when incurred. The other statements misstate the timing, mix up which events trigger recognition, or imply the methods are the same.

This tests the timing of recognizing revenue and expenses in two common methods. Cash accounting records revenue and expenses only when cash actually changes hands, reflecting actual cash flow. Accrual accounting records revenue when it has been earned (the work is done or goods are delivered) and records expenses when they are incurred (the obligation arises), regardless of when cash is paid.

So the correct description is that cash records revenue and expenses when cash changes hands, while accrual records revenue when earned and expenses when incurred. The other statements misstate the timing, mix up which events trigger recognition, or imply the methods are the same.