What distinguishes cash accounting from accrual accounting?

Cash accounting is characterized by the recognition of revenue and expenses at the moment cash is actually received or paid. This method focuses on the cash flow in and out of the business, meaning that transactions are recorded only when cash changes hands. For instance, if a company provides a service in January but does not receive payment until February, under cash accounting, the revenue would not be recognized until February when the cash is received.

This approach contrasts with accrual accounting, which recognizes revenue and expenses when they are incurred, regardless of when cash transactions occur. Accrual accounting provides a more accurate picture of a company's financial position by accounting for money that is owed or that is to be received, thereby matching revenues and expenses to the period in which they are earned or incurred.