What is the main difference between cash and accrual accounting?

The main distinction between cash and accrual accounting lies in the timing of when transactions are recorded. In cash accounting, revenues and expenses are recognized only when cash changes hands. This means that income is recorded when it is received, and expenses are logged when they are paid. Conversely, accrual accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when the cash is actually received or paid. This approach provides a more accurate reflection of a company's financial position and performance over a specific period, aligning with the matching principle where revenues and related expenses are recorded in the same period.

Understanding this difference is crucial for evaluating financial statements accurately and for making informed decisions based on a company's financial health. While factors such as cash flow management, the nature of income sources, and the complexity of financial statements are relevant to both methods, the core distinction that fundamentally differentiates the two systems is indeed when the transactions are recorded.