Cash-Basis Accounting

By Entrepreneur Staff

Pencil

Cash-Basis Accounting 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.

More from Accounting

Cash Flow

The difference between the available cash at the beginning of an accounting period and that at the end of the period. Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of asset

See full definition

Cash Flow Statement

A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period

See full definition

Cash-Basis Accounting

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.

See full definition

Accountant

A person whose work it is to inspect, keep or adjust accounts

See full definition

Latest Articles

Side Hustle

At 16, She Started a Side Hustle While 'Stuck at Home.' Now It's on Track to Earn Over $3.1 Million This Year.

Evangelina Petrakis, 21, was in high school when she posted on social media for fun — then realized a business opportunity.

Health & Wellness

I'm a CEO, Founder and Father of 2 — Here Are 3 Practices That Help Me Maintain My Sanity.

This is a combination of active practices that I've put together over a decade of my intense entrepreneurial journey.

Business News

Remote Work Enthusiast Kevin O'Leary Does TV Appearance Wearing Suit Jacket, Tie and Pajama Bottoms

"Shark Tank" star Kevin O'Leary looks all business—until you see the wide view.