Final answer:
The key difference between accrual and cash basis accounting is the timing of revenue and expense recognition; accrual records transactions when earned or incurred, while cash basis only when cash is exchanged.
Step-by-step explanation:
The primary difference between the accrual basis and the cash basis of accounting is the timing of when revenues and expenses are recognized. Under the accrual basis of accounting, transactions are recorded when they are earned or incurred, regardless of when the cash is actually exchanged. This means that income is reported when it is earned, and expenses are recorded when they are incurred, rather than when the money changes hands. In contrast, the cash basis of accounting recognizes revenue and expenses only when cash is received or paid.
This distinction is crucial for understanding different conceptions of profit, such as accounting profit and economic profit. Accounting profit is characterized as a cash concept, which is the total revenue minus explicit costs or, in other words, the difference between dollars received and dollars spent. Economic profit, however, takes into account both explicit and implicit costs, being the total revenue minus total cost. A business pays income taxes based on its accounting profit, but its economic success is determined by its economic profit.