What is the primary distinction between cash basis and accrual basis accounting?

The primary distinction between cash basis and accrual basis accounting lies in the timing of when revenues and expenses are recognized. Under cash basis accounting, revenues and expenses are recorded only when cash is exchanged. This means that income is recognized when cash is actually received, and expenses are recognized when cash is paid out. This method is straightforward and provides a clear picture of the cash flow of a business, making it easier to manage daily operations.

In contrast, accrual basis accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash is actually exchanged. This means that under accrual accounting, a company may record revenue at the point of sale, even if cash has not yet been received, and expenses are recorded when incurred, even if they have not yet been paid. This provides a more comprehensive view of a company's financial position over a period, matching income earned to the expenses incurred to generate that income.

Thus, the correct choice highlights that cash basis accounting is focused on cash transactions, which is crucial for understanding cash flow directly.