How do accrual accounting and cash-basis accounting differ in recognizing revenue and expenses?

• A. Accrual recognizes revenue when cash is received; expenses when cash is paid.
• B. Cash-basis recognizes revenue when earned; expenses when incurred.
• C. Accrual recognizes revenue when earned and expenses when incurred; cash-basis recognizes them when cash is exchanged.
• D. Both approaches record revenue and expenses identically.

Answer: (C)

Recognition timing is what distinguishes accrual from cash-basis accounting. In accrual accounting, revenue is recorded when it is earned—when the goods are delivered or the service is performed and there is a right to payment—and expenses are recorded when they are incurred—when the obligation to pay arises, not when cash actually changes hands. In cash-basis accounting, revenue is recorded only when cash is received, and expenses are recorded only when cash is paid out. So the statement that accrual recognizes revenue when earned and expenses when incurred, while cash-basis recognizes them when cash is exchanged, accurately describes the two approaches. For example, if you deliver services and bill a client but haven’t yet received payment, accrual records the revenue now; cash-basis would wait until cash is received. Similarly, if you incur a bill but pay later, accrual records the expense when the bill is incurred, whereas cash-basis records it only when the cash is actually paid.