What describes cash accounting?

• A. Revenue and expenses recognized when cash is received or paid.
• B. Revenue and expenses recognized when earned, regardless of cash
• C. It is not suitable for professional practices
• D. It is identical to accrual accounting

Answer: (A)

Cash accounting records revenue and expenses only when cash actually changes hands. This means revenue is recognized when payment is received and expenses are recognized when payment is made, not when the service is performed or the bill is received. This timing is the defining difference from accrual accounting, which records income when earned and expenses when incurred, regardless of cash flow. Because of this, cash accounting gives a straightforward picture of cash flow but can misstate profitability if there are outstanding receivables or payables. The other statements describe accrual timing, claim it isn’t suitable for professional practices, or say it’s the same as accrual accounting, which is not accurate.