Which statement describes the relationship between accrual and cash accounting?

Which statement describes the relationship between accrual and cash accounting?

• A. Cash accounting recognizes revenue when earned, while accrual recognizes when cash changes hands.
• B. Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of cash, while cash accounting records when cash changes hands.
• C. Cash accounting and accrual accounting are identical in recognizing revenue.
• D. Accrual accounting ignores non-cash items entirely.

Answer: (B)

Under accrual accounting, revenues and expenses are recorded when they are earned or incurred, not when cash actually changes hands. This approach ties recognition to the economic activity itself, and it uses accounts like accounts receivable and payable to reflect amounts owed or owed to others. Cash accounting, by contrast, only records transactions when cash is exchanged. The statement shown is correct because it states that revenue is recognized when earned and expenses when incurred, regardless of cash, while cash accounting records what happens when cash changes hands. That contrast captures the fundamental difference between the two methods. The other descriptions don’t fit because one reverses the timing of revenue recognition for cash accounting, another claims the two methods recognize revenue identically, and another implies accrual ignores non-cash items like receivables, depreciation, and prepaid expenses—areas accrual accounting explicitly includes.

Under accrual accounting, revenues and expenses are recorded when they are earned or incurred, not when cash actually changes hands. This approach ties recognition to the economic activity itself, and it uses accounts like accounts receivable and payable to reflect amounts owed or owed to others. Cash accounting, by contrast, only records transactions when cash is exchanged.

The statement shown is correct because it states that revenue is recognized when earned and expenses when incurred, regardless of cash, while cash accounting records what happens when cash changes hands. That contrast captures the fundamental difference between the two methods.

The other descriptions don’t fit because one reverses the timing of revenue recognition for cash accounting, another claims the two methods recognize revenue identically, and another implies accrual ignores non-cash items like receivables, depreciation, and prepaid expenses—areas accrual accounting explicitly includes.