Cash Accounting
Recording revenue and expenses only when cash is received or paid.
Definition
Cash accounting (or cash basis accounting) records transactions only when money actually changes hands. Revenue is recognized when payment is received, and expenses are recorded when paid—regardless of when the work was performed or the expense incurred.
Cash accounting is simpler than accrual accounting and is permitted for small businesses and sole proprietors. Many businesses use cash accounting for tax purposes while maintaining accrual-based internal records for better decision-making.
Why It Matters
Cash accounting is simpler to maintain and shows exactly how much cash moved in and out. For small businesses, it can be more intuitive—what you collected is your income, what you paid is your expense.
However, cash accounting can mask business performance. A slow-paying client might make January look bad even though you did great work, while collecting old receivables might make a slow month look artificially good.
Examples
- 1
A freelancer using cash accounting invoices a client in December but doesn't record income until the check arrives in January.
- 2
A small business pays for a year of software upfront. Under cash accounting, the full amount is a January expense even though it covers 12 months.
- 3
A business uses cash accounting for tax returns (simpler, allows some timing strategies) but reviews accrual reports internally.
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