DECA+ Business Management and Administration Practice Exam

How does cash accounting differ from accrual accounting?

1. Income is recorded when invoiced

2. Transactions are recorded at the time of cash exchange

3. Only liabilities are reported

4. It focuses solely on cash available

The correct answer is: Transactions are recorded at the time of cash exchange

Cash accounting differs from accrual accounting primarily in the timing of when transactions are recorded. In cash accounting, transactions are recorded at the time of cash exchange. This means that income is recognized only when cash is actually received, and expenses are recognized only when cash is actually paid out. This approach provides a straightforward view of the cash flow of a business, making it easier to track cash available for immediate expenses and obligations. On the other hand, accrual accounting recognizes income and expenses when they are incurred, regardless of when the cash is exchanged. This method provides a more accurate picture of a company’s financial situation by matching revenue earned with the expenses incurred to generate that revenue, allowing businesses to see their actual financial performance over a given period. The other choices hint at aspects of accounting but do not accurately capture the fundamental distinction between cash and accrual accounting. For instance, recording income when invoiced or focusing solely on cash available does not reflect the broader principles of how transactions are logged in the accounting records. Cash accounting is inherently tied to actual cash flow, giving it a unique position compared to the broader and more comprehensive accrual approach.