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

The main difference between cash basis and accrual basis accounting is that accrual basis recognizes revenues and expenses when they are earned or incurred, regardless of when cash is actually received or paid. This means that under the accrual basis, a business records revenue when services are performed or goods are delivered, and it recognizes expenses when they are incurred, even if the cash transactions occur at a later date.

This method provides a more accurate picture of a company's financial position and performance over a specific period, as it takes into account all economic activities rather than just cash transactions. For example, if a company delivers a product in December but doesn't receive payment until January, under the accrual basis, the revenue would still be recognized in December when the sale took place.

In contrast, the cash basis of accounting only recognizes revenue when cash is received and expenses when cash is paid. This can present a limited view of financial performance since it does not account for outstanding receivables or payables. The statement about cash basis recognizing revenue when earned is incorrect because cash basis recognizes revenue only when cash is received. Similarly, the options regarding the usage of cash basis for all businesses are misleading, as not all businesses—especially larger ones or those publicly traded—are permitted to use