Cash basis accounting is an accounting method that recognizes revenue and expenses when cash is exchanged, as opposed to accrual basis accounting which recognizes revenue and expenses as soon as they are earned or incurred regardless of when money is exchanged.
Cash basis accounting is simpler and more straightforward because it follows a ‘cash in, cash out’ approach: each time cash is received or paid out, the corresponding transaction is entered into the books. This makes it easier to track short-term cash flows.
In contrast, accrual basis accounting often captures more accurate information since it takes into account all transactions related to sales, receivables and payables. This helps business owners gain insight into their company’s financial health, even when there’s a lag between when services are offered and payment is made.