What distinguishes cash from accrual accounting?

The distinction between cash and accrual accounting fundamentally lies in how transactions are recognized in relation to cash flow. Cash accounting records transactions only when cash is actually received or paid. This means that revenue is only recognized when payment is made, and expenses are recognized only when they are incurred, leading to a direct correlation with cash movements.

In contrast, accrual accounting recognizes revenues when they are earned, regardless of when the cash is received. Similarly, expenses are recorded when they are incurred, not necessarily when cash is paid out. This method provides a more comprehensive view of a company’s financial position and performance, as it includes obligations and revenues not yet settled in cash, allowing for better financial planning and analysis.

Understanding that cash accounting focuses exclusively on real-time cash transactions clarifies why option C is the correct choice. It highlights the primary characteristic of cash accounting as being tied directly to the flow of cash, making it distinct from the accrual method, which is broader in recognizing financial activities.