Cash accounting is an accounting system used to record financial transactions based on when money is exchanged. This means that transactions are only recorded when cash is actually received or paid out and not when they are billed or incurred. This simplifies the bookkeeping process as it doesn’t require businesses to track data such as accounts receivable or accounts payable.
Accrual accounting, on the other hand, records financial transactions in the period when they occur regardless of whether cash has been received or spent. This practice allows businesses to accurately measure their finances by providing a closer snapshot of their financial performance. Businesses using accrual accounting may also benefit from reduced taxation liability because they must pay taxes on profits earned, rather than on money received.