Cash-Basis Accounting
What Is Cash-Basis Accounting?
Cash-basis accounting is an accounting method in which income and expenses are recorded only when money is actually received or paid. Under this system, financial transactions are recognized based on the movement of cash rather than when the transaction occurs.
This method is commonly used by small businesses, freelancers, and independent contractors because it is simple to maintain.
Why It Matters
Cash-basis accounting provides a clear view of how much money is actually flowing into and out of a business. Because it focuses on real cash transactions, it can make budgeting and cash-flow management easier.
Many small businesses use this method for internal bookkeeping and tax reporting when they meet eligibility requirements.
How Cash-Basis Accounting Works
Under cash-basis accounting:
- income is recorded when payment is received
- expenses are recorded when they are paid
Transactions that have been earned or incurred but not yet paid are not recorded until the money changes hands.
Example
If a consultant completes a project in June but receives payment in July, the income is recorded in July under cash-basis accounting.
Cash-Basis Accounting vs Accrual Accounting
- Cash-basis accounting records transactions when cash is exchanged.
- Accrual accounting records transactions when income is earned or expenses are incurred.
FAQs About Cash-Basis Accounting
Who typically uses cash-basis accounting?
Small businesses, freelancers, and sole proprietors commonly use it.
Is cash-basis accounting easier to manage?
Yes, it is generally simpler than accrual accounting.
Can a business switch accounting methods?
In some cases, businesses may change methods with proper approval.
Related Terms
