What is cash basis accounting?

Cash basis accounting is a method of accounting in which revenues and expenses are recognized only when cash is actually received or paid. This approach provides a straightforward view of cash flow, making it easier for businesses, particularly small ones, to track their incoming and outgoing cash.

When revenue is recorded only upon receipt of cash, and expenses are recorded when they are paid, this method reflects the immediate financial position of the business. For example, if a business sells a product but has not yet received payment, it does not recognize that revenue until the cash is in hand. Similarly, expenses are only recorded when payment is made, regardless of when the expense was incurred.

This method is beneficial for businesses that prefer to keep their accounting simple and ensure that they are only accounting for actual cash flow, which can be crucial for managing day-to-day operations effectively.