In terms of accounting, what is the main difference between accrual-basis and cash-basis accounting?

The primary distinction between accrual-basis and cash-basis accounting lies in the timing of when revenues and expenses are recognized. With accrual-basis accounting, revenue is recognized when it is earned, meaning that the service has been provided or the product has been delivered, regardless of when cash is actually received. This approach provides a more accurate picture of a company's financial position because it reflects economic events as they occur, rather than simply recording cash transactions.

In contrast, cash-basis accounting records revenues and expenses only when cash is exchanged. This can lead to a situation where financial statements do not fully capture all income earned and expenses incurred, as some may occur without immediate cash flow.

Choosing this understanding elucidates how accrual accounting aligns with the matching principle, ensuring that revenues and expenses are recognized in the same period, which is essential for stakeholders evaluating financial performance over time.