What is the difference between cash basis and accrual basis reports?

• A. Cash basis shows cash receipts and payments; accrual shows income/expenses when earned/incurred, regardless of cash.
• B. Cash basis ignores cash; accrual records cash flow only.
• C. Cash basis is for small businesses; accrual is for large.
• D. Cash basis includes future revenues; accrual excludes them.

Answer: (A)

The timing of when revenue and expenses are recognized is what distinguishes cash basis from accrual. In cash basis reporting, you record revenue only when cash is actually received and expenses only when cash is paid, so the figures reflect actual cash flow. In accrual reporting, you record revenue when it is earned (when you’ve delivered the goods or services) and expenses when they are incurred (when the obligation arises), regardless of when cash moves. This means accrual can show amounts you’ve earned but haven’t yet collected (accounts receivable) and obligations you’ve incurred but haven’t yet paid (accounts payable), giving a fuller picture of financial performance for the period. The other statements misstate how cash movements and future revenues are treated.