Cash basis accounting is the practice of recognizing revenue and expenses as they are received and paid, respectively. In this system, income or losses for a given period are calculated based solely on actual cash flows into and out of a business. This method of accounting is often used by small businesses and personal budgeters.

Accrual basis accounting takes into account both current and future cash flows. This method recognizes revenue when it is earned, regardless of when it is actually collected, and expense when they are incurred, not necessarily when they are paid. This approach provides more accurate information regarding the overall financial condition of a business over time.