What is the key difference between cash and accrual accounting?

The key difference between cash and accrual accounting lies in the timing of when revenues and expenses are recognized in the financial statements. Accrual accounting records transactions when they occur, regardless of whether cash has been exchanged. This method provides a more accurate picture of a company's financial health by including all obligations and earnings within the accounting period they pertain to.

For example, if a company provides services in one month but does not receive payment until the following month, accrual accounting would recognize that revenue in the month the services were rendered. This allows for a better matching of income and expenses within the same time period, providing a clearer view of financial performance.

In contrast to this, cash accounting recognizes revenues and expenses only when cash is actually exchanged. This approach can lead to a distorted view of a business's financial position, especially if significant amounts of transactions take place on credit.

The other options fail to capture the essence of this fundamental distinction between the two accounting methods.