What distinguishes cash basis accounting from accrual basis accounting?

The defining characteristic of cash basis accounting is that it recognizes revenues only when cash is actually received, and expenses only when cash is paid. This means that transactions are recorded at the point of cash exchange, rather than when they are incurred or earned. In contrast, accrual basis accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash changes hands. This method provides a more accurate picture of a company's financial position because it accounts for all economic events, not just those involving cash transactions.

Option B captures this distinction perfectly: under cash basis, revenue recognition hinges on cash exchanges, while accrual basis recognizes revenue when it is earned, independent of cash transactions. This fundamental difference affects how businesses report their financial performance and can have implications for financial analysis and decision-making.