Certified Meeting Professional (CMP) Practice Exam

What is a key characteristic that differentiates accrual accounting from cash accounting?

1. Accrual accounting only records actual cash flow

2. Accrual accounting records income when earned, not necessarily received

3. Cash accounting is more complex than accrual accounting

4. Cash accounting includes both current and future revenues

The correct answer is: Accrual accounting records income when earned, not necessarily received

Accrual accounting is distinguished by its recognition of income and expenses when they are incurred, rather than when cash is actually exchanged. This means that under accrual accounting, revenue is recorded as soon as it is earned, regardless of when the cash is received. This approach provides a more accurate picture of a company’s financial health and performance over time, as it accounts for all resources generated, which can be crucial for decision-making in financial management. The other options do not accurately describe the key differentiator of accrual accounting. For instance, cash accounting solely focuses on the actual cash flow and may not reflect income before the cash is received, therefore making it less comprehensive in capturing financial activities. Additionally, it is typically simpler than accrual accounting, not more complex, which also sets apart the two methods in terms of ease of recording transactions. Lastly, cash accounting deals with revenues only when cash is received; it does not account for future revenues or anticipated income until it is actually received.