Which statement best describes cash basis vs accrual basis accounting?

• A. Cash basis recognizes revenues when earned and expenses when incurred; accrual basis recognizes revenues when cash is exchanged and expenses when paid
• B. Cash basis recognizes revenues when cash is exchanged and expenses when cash is paid; accrual basis recognizes revenues when earned and expenses when incurred
• C. Cash basis recognizes revenues when earned and expenses when incurred; accrual basis recognizes revenues when cash is exchanged and expenses when incurred
• D. Cash basis records all transactions regardless of timing; accrual ignores timing

Answer: (B)

Understanding when revenues and expenses are recognized is the key idea. Cash basis accounting records transactions only when cash actually moves: revenues are recorded when cash is received, and expenses are recorded when cash is paid. Accrual basis accounting records revenues when the earning process is complete (earned), regardless of when cash is received, and records expenses when the obligation is incurred, regardless of when cash is paid.

The best description matches that cash basis: revenue recognized when cash is exchanged and expenses recognized when cash is paid; accrual recognizes revenue when earned and expenses when incurred. For example, if you perform a service in December but get paid in January, cash basis would record the revenue in January, while accrual would record it in December. If you incur an expense in December but pay in January, accrual would record the expense in December, while cash basis would record it in January. This illustrates why the stated distinction is correct.