What is a key distinction between cash-based and accrual accounting?

The key distinction between cash-based and accrual accounting lies in the timing of when transactions are recognized in the financial statements. In cash-based accounting, revenue and expenses are recorded only when cash is actually received or paid. This means that expenses are recorded when the cash is spent, reflecting a straightforward and immediate association between cash flow and financial transactions. This approach is often simpler and more intuitive for small businesses or individuals who want to track their cash position closely.

In contrast, accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash is exchanged. This method provides a more comprehensive view of a company's financial health by matching income with the expenses incurred to generate that income within the same period, thereby allowing for a clearer understanding of profitability and performance over time.

The other options do not accurately depict the key distinction. For instance, while accrual accounting recognizes revenue at the point of sale or when a service is performed, it does not limit recognition to cash flow events. Additionally, cash-based accounting does not typically recognize income before payment, and accrual accounting does indeed track cash flow, but its focus is on the timing of revenue and expense recognition rather than immediate cash flow insights.