Definition: An accounting system that doesn't record accruals but instead
recognizes income (or revenue) only when payment is received and
expenses only when payment is made. There's no match of revenue
against expenses in a fixed accounting period, so comparisons of
previous periods aren't possible.
The cash method is simple in that the business's books are kept
based on the actual flow of cash in and out of the business. Income
is recorded when it's received, and expenses are reported when
they're actually paid. The cash method is used by many sole
proprietors and businesses with no inventory. From a tax
standpoint, it's sometimes advantageous for a new business to use
the cash method of accounting. That way, recording income can be
put off until the next tax year, while expenses are counted right
away.
The cash method may also continue to be appropriate for a small,
cash-based business or a small service company. You should consult
your accountant when deciding which accounting method would be best
for your company.