Cash Basis Accounting
An accounting method that records income when payment is actually received and expenses when they're actually paid.
Definition
Cash basis accounting recognizes revenue when the money lands in your account—not when you send the invoice—and records expenses when you actually pay them. If you invoice a client $4,000 in November but they pay in January, that income belongs to January under cash basis. It mirrors what your bank account is doing, which is why most freelancers and small businesses use it.
The alternative is accrual accounting, which records income when it's earned (the invoice date) and expenses when they're incurred, regardless of when cash moves. Accrual gives a more accurate picture of profitability over time, but it's more work and can show profit you haven't actually collected. In the US, most small businesses can choose either method for taxes, though businesses over certain revenue thresholds or those carrying inventory may be required to use accrual.
Why It Matters
Your accounting method directly changes your tax bill timing. Under cash basis, an invoice paid on January 3rd instead of December 28th shifts that income into the next tax year—a real lever if you've had a strong year and want to defer income. It also means you never pay tax on invoices that haven't been paid yet, which matters when clients are slow.
The trade-off is visibility. Cash basis books can look great in a month when three old invoices finally got paid, and terrible in a month when you did lots of billable work but nothing cleared. If you're evaluating whether a service line is actually profitable, or preparing financials for a loan, you may need accrual-style reports even if you file taxes on cash basis.
Examples
- 1
A consultant invoices $6,000 on December 15th and gets paid January 10th. On cash basis, that $6,000 is income for the new tax year.
- 2
A freelancer pays a $1,200 annual software subscription in March. The full $1,200 is a March expense, not $100 spread across each month.
- 3
A studio with $30,000 in unpaid invoices shows no revenue from them yet—on cash basis, nothing counts until clients actually pay.
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