How does the cash method of accounting record income and expenses?

The cash method of accounting records income and expenses at the time they are received or paid. This means that income is recognized when cash is actually received by the business, and expenses are considered incurred when cash is paid out. This approach provides a clear view of cash flow for a business, allowing for straightforward tracking of financial performance based on actual cash transactions.

By focusing on cash movement, it gives a more immediate and realistic picture of the company's financial situation, as it does not involve estimates or accruals like other accounting methods might. For instance, if a contractor receives payment for services on a specific date, that income is recorded on that same date, not when the work is completed or invoiced. Similarly, expenses are only recorded when the cash is actually disbursed, helping businesses manage their cash flow effectively.

In contrast, other accounting methods, such as accrual accounting, involve recognizing income and expenses when they are earned or incurred, irrespective of cash transactions, which can complicate cash flow analysis.