Accrual based accounting means you record your transactions when they are meant to happen, not when the cash comes or goes. This is what all public companies, and most mid-sized companies or companies with investors use. Cash based accounting is based on when the actual cash came in or went out. This is what you use in your personal life if you do personal finance tracking. Almost all self-employed individuals use cash-based accounting. For example, if you send your client an invoice on Dec 26 for the work you did in Dec, and the client pays you on Jan 3, in accrual accounting, the income from this invoice is recorded into Dec, in cash based accounting, its recorded into Jan of the next year. This is why end of year tax planning strategies are very critical to reducing your tax bill.
