Cash accounting is a simple and straightforward method of bookkeeping where income and expenses are recorded only when money actually changes hands. This means that revenue is recognized when it is received, and expenses are recorded when they are paid, rather than when they are incurred. It contrasts with accrual accounting, which records income and expenses when they are earned or incurred, regardless of when cash is exchanged.

Cash accounting is commonly used by small businesses, sole proprietors, and freelancers because it provides a clear picture of how much cash the business truly has on hand. It’s easier to maintain and often sufficient for tax purposes, especially for businesses with relatively simple financial transactions.

One major advantage of cash accounting is its simplicity—it’s easier to track cash flow and understand the financial position of the business at a glance. However, it can also provide a distorted view of profitability. For example, a business may appear profitable simply because it hasn't paid its bills yet, or may look unprofitable because income expected soon hasn’t yet arrived.

In Canada, businesses must meet certain criteria to use cash accounting for tax purposes. It’s important to consult a professional to determine the most appropriate method based on your business needs.