What is cash basis of accounting?

Cash basis of accounting is a method of accounting where businesses record revenues and expenses only when cash is received and paid, respectively, rather than when the transaction occurs or is billed. Under the cash basis, income is reported when cash is received, regardless of when the goods or services were delivered. Similarly, expenses are recognized when cash is paid out, without considering the timing of the underlying transaction or the delivery of the goods or services.

The cash basis of accounting is relatively straightforward and easy to implement, as it does not require businesses to track accounts receivable or accounts payable. However, it can also be less accurate than accrual accounting, as it does not take into account transactions that have occurred but for which cash has not yet been received or paid.

Cash basis accounting is often used by small businesses, sole proprietors, and freelancers, as it simplifies their financial management process. It can also be beneficial for businesses that primarily deal in cash transactions, as it aligns with the flow of cash and can provide a clear overview of their financial situation at any given time.