QuickBooks Certification Practice Test

The primary difference between cash basis and accrual basis accounting is indeed captured in the statement that cash basis records income and expenses only when cash is exchanged, while accrual basis records income when it is earned and expenses when they are incurred, regardless of the cash flow.

In cash basis accounting, transactions are recorded only when cash is received or paid. This means that if a sale occurs on credit, it is not recorded until the cash is received. This method is straightforward and can provide a clearer view of cash flow at any given time, which is why many small businesses prefer it. However, it does not provide a complete picture of a company's financial situation because it can overlook obligations or income that has not been realized in cash form.

On the other hand, accrual basis accounting adheres to the matching principle, which recognizes revenues and expenses in the period they are incurred. This means that income is recorded in the financial statements when it is earned, and expenses are recorded when they are incurred, providing a more accurate representation of financial performance. This method is favored by larger businesses and those required by accounting standards to provide a more comprehensive view of their financial health, as it considers all of their financial activities, not just cash transactions.

Therefore, option B