Cash Basis Accounting is a method of accounting which recognizes only cash transactions when recording income and expenses. Transactions enter the books as they happen and it’s generally used by small businesses or contractors with little complexity in their accounts. With Cash Basis Accounting, income is recognized when payment is received, and expenses are recognized when the payments are made.

Accrual Basis Accounting is the more traditional approach to accounting. It records revenue when products are sold and goods are shipped regardless of when payment is received. Expenses are similarly recorded when due (not when paid). All forms of revenue, such as interest earned, must be reported even if payment has not been received yet. Accrual accounting allows businesses to track their inventory levels and can provide better insight into financial health over time.