What is the difference between accrual accounting and cash accounting?

What is the difference between accrual accounting and cash accounting Introduction: The Foundation of Accounting Before we dive into the differences between accrual accounting and cash accounting, let's establish a basic understanding of accounting itself. At its core, accounting is the process of recording, summarizing, and analyzing financial transactions. This information is crucial for decision-making, financial reporting, and compliance purposes. Now, let's explore the two main approaches to accounting. Accrual Accounting: Recognizing Revenue and Expenses Accrual accounting is based on the accrual principle, which states that revenue and expenses should be recognized when they are earned or incurred, regardless of when the cash is received or paid. In other words, it focuses on the economic substance of a transaction rather than the actual flow of cash. This method provides a more accurate picture of a company's financial health, as it reflects the current state of its obligations and future cash flows. Cash Accounting: Emphasizing Cash Inflows and Outflows Unlike accrual accounting, cash accounting follows the cash principle. It recognizes revenue when cash is received and expenses when cash is paid. This method is simpler and more straightforward, making it popular among small businesses and individuals. However, it may not provide an accurate representation of a company's financial position, especially if there are significant time lags between transactions and cash movements. Key Differences: Timing and Accuracy