There are two types of accounting that can be used in personal finance: cash-basis accounting and accrual-basis accounting.
Cash-basis accounting is the simpler of the two methods. With cash-basis accounting, transactions are only recorded when money changes hands. This means that income is only recognized when it is received, and expenses are only recognized when they are paid.
While this method is easier to use, it can also be less accurate. This is because it does not take into account money that may be owed or earned in the future (such as unpaid invoices or interest on investments). As a result, cash-basis accounting can give you a skewed picture of your financial situation.
Accrual-basis accounting is more complex, but it provides a more accurate picture of your finances. With accrual-basis accounting, transactions are recorded when they occur, regardless of when money changes hands. This means that income is recognized when it is earned, and expenses are recognized when they are incurred.
While this method requires more record keeping, it gives you a more accurate picture of your financial situation by taking into account all money owed or earned (regardless of whether it has been paid yet).