Which accounting method records expenses when cash is paid?

The correct answer is cash accounting because this method specifically recognizes and records expenses only when cash payments are made. In cash accounting, revenue and expenses are recorded when cash is received or paid out, making it straightforward and easy to track actual cash flow.

This method is particularly beneficial for small businesses or individuals where cash flow management is critical, as it allows them to see the precise cash position at any time. Because cash accounting follows the cash flow principles, it does not consider accounts receivable or accounts payable until the cash is involved, making the financial picture less complex in terms of outstanding payments or future income that hasn't yet been received.

In contrast, accrual accounting records expenses and revenues when they are incurred, regardless of when cash is exchanged. This approach adheres to the matching principle, which seeks to match income with expenses in the period they occur, providing a more comprehensive view of financial health over time. Accrual basis with cash adjustments involves a mix of these methods, which is not applicable in this context. Financial accounting encompasses the entire field of accounting practices and reporting, more broadly addressing financial information for external users rather than focusing on the timing of cash transactions.