Cash basis accounting

Definition

Cash basis accounting is a method of recording revenues and expenses only when cash is actually received or paid. This approach contrasts with accrual basis accounting, which records transactions when they are incurred regardless of cash flow.

5 Must Know Facts For Your Next Test

1. Revenues are recognized only when cash is received.
2. Expenses are recorded only when they are paid in cash.
3. Cash basis accounting is simpler but less accurate for matching revenues with expenses.
4. This method is often used by small businesses and individuals due to its simplicity.
5. It does not conform to Generally Accepted Accounting Principles (GAAP) for most businesses.

Review Questions

• When are revenues recognized under cash basis accounting?
• What is a primary advantage of using cash basis accounting?
• Why might larger businesses prefer accrual basis over cash basis accounting?

Related terms

Accrual Basis Accounting:

A method where revenues and expenses are recorded when they are earned or incurred, regardless of when the cash transactions occur.

Income Statement:

A financial statement that shows a company's revenue and expenses over a specific period, resulting in net profit or loss.

Statement of Cash Flows:

A financial statement that outlines the inflow and outflow of cash within a company, categorizing into operations, investing, and financing activities.