What distinguishes cash basis from accrual basis accounting?

The distinction between cash basis and accrual basis accounting lies primarily in the timing of when transactions are recorded in the financial statements. Under cash basis accounting, revenues and expenses are recognized only when cash is actually received or paid. This approach provides a straightforward view of cash flow, as it aligns the recording of transactions with the actual cash movements in and out of the business.

In contrast, accrual basis accounting records transactions when they are incurred, regardless of the timing of cash exchanges. This means that revenues are recognized when earned, and expenses are recognized when incurred, which may occur before cash exchanges take place. This method provides a more accurate picture of a company's financial position and performance over a given period, as it includes all relevant financial events, whether or not cash has changed hands.

The other options do not accurately capture the fundamental differences between the two methods. For example, cash basis accounting does account for expenses, just not at the time they are incurred unless cash is paid. Similarly, both cash and accrual basis accounting can be used by various sizes of businesses and do not inherently require audits based on their designation.