As per Basic Principles of Accounting, there are two methods recognize income/revenue or expenses, i.e. on CASH basis or on ACCRUAL basis.

In ACCRUAL basis, income/revenue is recognized at the time of occurrence of sale transaction, irrespective of the fact of payment being received at the same time or some time later. For eg., A follows accrual basis of accounting in his business. He sells goods to B on 15/10/2014 but receives payment on 20/10/2014. Now, since he is following accrual method, he will record his sale transaction on 15th Oct. (i.e. as and when the transaction occurred), instead of 20th Oct. (i.e. as and when the payment is received.)

In CASH basis, income/revenue is recognized at the time of receipt of payment, irrespective of the time of occurrence of the sale transaction. Following the above example, if A follows cash basis of accounting then he will record the sale on 20th Oct, instead of 15th Oct. (at the time when he receives money for the goods sold).

The same concept can be followed for expenses too. There are times when we pay for expenses at a later date (usually in case of recurring or regular expenses directly associated with our business). In Cash basis, we record the expenses at the time when we pay for them, and in accrual basis we record expenses as and when they occur.

Cash method does a remarkable job in tracking cash flow because it records inflows and outflows as and when they occur. This feature is not found in accrual method of accounting.

Cash method is suitable for small scale enterprises.