GAAP vs tax accounting: which statement is true?

• A. GAAP is accrual-based, but tax is cash-based.
• B. GAAP uses straight-line depreciation, but tax is accelerated.
• C. GAAP is more complex and more accurately tracks assets/liabilities, whereas tax focuses on current period revenue/expenses.
• D. GAAP ignores revenue for taxes.

Answer: (A)

The key idea here is the timing basis of accounting. GAAP financial reporting uses accrual accounting, recognizing revenue when it’s earned and expenses when they’re incurred, and it records assets, liabilities, and other obligations on the balance sheet. Tax accounting, by contrast, generally follows cash-based timing rules for recognizing income and deductions, so amounts are recognized when cash actually moves (subject to various code-specific rules). This difference in timing creates the gap between pretax financial income under GAAP and taxable income, which is exactly what the statement captures.

Depreciation specifics can vary and tax depreciation (like MACRS) is typically accelerated, while GAAP allows different methods, but the central point—the accrual vs. cash timing distinction—is the best overall descriptor of their relationship. Hence, the statement describing GAAP as accrual-based and tax as cash-based is the most accurate.