Which definition best describes cash accounting?

The definition that best describes cash accounting is the method that records revenues and expenses when cash is actually received or paid out. This accounting approach is characterized by its straightforwardness, as it only recognizes financial transactions when the cash exchange occurs. Consequently, a business using cash accounting would record income when payments are received, regardless of when the sale took place, and would log expenses when bills are paid, not when they are incurred.

This method is particularly beneficial for small businesses or individuals who need to keep track of cash flow closely and prefer simplicity in financial reporting. It contrasts with accrual accounting, which includes transactions and expenses when they are incurred, regardless of when cash is exchanged. This distinction is crucial for understanding how cash accounting works and its implications for financial reporting and management.