Which statement best describes cash-based versus accrual accounting?

Which statement best describes cash-based versus accrual accounting?

• A. Cash-based recognizes revenue when cash is earned; accrual recognizes revenue when cash is received
• B. Cash-based and accrual are identical for large firms
• C. Cash-based recognizes revenue when cash is received; accrual recognizes revenue when earned and collection is reasonably certain, and expenses when incurred
• D. Cash-based recognizes revenue when cash is received; accrual recognizes revenue when cash is paid

Answer: (C)

The main idea is how revenue and expenses are recognized under different accounting methods. Under cash accounting, revenues and expenses are recorded only when cash actually moves—so revenue is recorded when cash is received and expenses when cash is paid. Under accrual accounting, revenues are recorded when they are earned (the good or service is delivered) and collection is reasonably certain, even if cash hasn’t been received yet; expenses are recorded when incurred, not when they’re paid. This approach matches revenues with the expenses incurred to generate them, giving a more accurate view of profitability for a period. The statement that captures this is that revenue is recognized when earned and collection is reasonably certain, and expenses are recognized when incurred. The other descriptions mix up the timing, such as tying revenue to cash received in the accrual method or mis-stating when revenue is recognized.

The main idea is how revenue and expenses are recognized under different accounting methods. Under cash accounting, revenues and expenses are recorded only when cash actually moves—so revenue is recorded when cash is received and expenses when cash is paid. Under accrual accounting, revenues are recorded when they are earned (the good or service is delivered) and collection is reasonably certain, even if cash hasn’t been received yet; expenses are recorded when incurred, not when they’re paid. This approach matches revenues with the expenses incurred to generate them, giving a more accurate view of profitability for a period. The statement that captures this is that revenue is recognized when earned and collection is reasonably certain, and expenses are recognized when incurred. The other descriptions mix up the timing, such as tying revenue to cash received in the accrual method or mis-stating when revenue is recognized.