What differentiates cash accounting from accrual accounting?

The distinctive feature of cash accounting is that payments are recorded only when cash is received or paid out. This method focuses on actual cash transactions, meaning that revenues and expenses are recognized solely based on cash inflow and outflow. For instance, if a company sells a product but hasn't yet received payment, that transaction will not be recorded until the cash is received. This approach contrasts with accrual accounting, where revenues and expenses are recorded when they are earned or incurred, regardless of when cash changes hands.

This principle provides a straightforward way of tracking cash flow and is particularly useful for small businesses or individuals who need to manage their funds closely. The simplicity of cash accounting can be appealing, as it involves less complexity and fewer estimates compared to accrual accounting, which requires recognizing obligations and receivables that may not yet involve actual cash transactions.