Accrual vs Cash accounting is a two-part method of managing business finances. In the most basic terms, cash accounting is used to track money that is coming in and out of a business immediately, while accrual accounting tracks more of the long-term revenue and expenses to give an overall picture of how a business is doing financially.

In practice, when using the cash basis of accounting, businesses keep track of cash inflows and outflows—think sales payments and operational expenses like rent or inventory purchases—as they actually happen. This means that if a customer buys something from your business on January 5th but doesn’t pay until February 20th, you don’t record that sale until February 20th.

Conversely, with accrual accounting, transactions are recorded when they occur, regardless of when money changes hands. So in the same example above, you would record that customer’s purchase on January 5th. This gives businesses a better understanding of their total financial performance over time as opposed to just seeing the immediate effects of their transactions.