Which statement describes the difference between cash basis and accrual basis for taxes under GAAP?

Which statement describes the difference between cash basis and accrual basis for taxes under GAAP?

• A. GAAP financial statements use accrual accounting; tax reporting uses tax rules; temporary differences create deferred tax assets or liabilities.
• B. GAAP uses cash; tax uses accrual.
• C. There is no difference between GAAP and tax.
• D. GAAP uses cash for revenue recognition; tax uses cash.

Answer: (A)

Under GAAP, financial statements are prepared on an accrual basis: revenue is recognized when earned and expenses when incurred, regardless of when cash actually moves. Tax reporting follows tax rules that often differ from GAAP, so income and deductions can be recognized at different times for tax purposes. These timing differences between book and tax incomes are called temporary differences, and they can reverse in future periods, which is why they give rise to deferred tax assets or liabilities on the balance sheet. This captures why the accounting treatment for GAAP and taxes can diverge and how those divergences are accounted for. Other options misstate the relationship: GAAP is not cash-based for revenue recognition, and saying there is no difference ignores the known mismatches between book and tax rules.

Under GAAP, financial statements are prepared on an accrual basis: revenue is recognized when earned and expenses when incurred, regardless of when cash actually moves. Tax reporting follows tax rules that often differ from GAAP, so income and deductions can be recognized at different times for tax purposes. These timing differences between book and tax incomes are called temporary differences, and they can reverse in future periods, which is why they give rise to deferred tax assets or liabilities on the balance sheet. This captures why the accounting treatment for GAAP and taxes can diverge and how those divergences are accounted for.

Other options misstate the relationship: GAAP is not cash-based for revenue recognition, and saying there is no difference ignores the known mismatches between book and tax rules.