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

• A. Cash basis records revenues when cash is received; accrual records when goods are delivered
• B. Cash basis records expenses when cash is paid; accrual records expenses when goods are received
• C. Cash basis records every transaction; accrual records only long-term transactions
• D. Cash basis records transactions when cash is exchanged; accrual records when revenues are earned and expenses are incurred, regardless of cash

Answer: (D)

The main distinction is when you recognize the effects of activities in your books. In cash basis accounting, you record revenues only when cash is actually received and expenses only when cash is paid. In accrual accounting, you recognize revenues when they are earned (when the goods are delivered or services performed) and expenses when they are incurred (when the obligation arises), regardless of when cash moves.

For example, a sale made on credit is recorded as revenue in the period it’s earned under accrual, even if the cash arrives later. Conversely, a service received in one period but paid in the next is recorded as an expense in the period it was incurred under accrual, even if the cash payment occurs later. The described approach matches this timing, while the other statements mix up when revenues and expenses should be recorded.