What is 'cash basis accounting'?

Cash basis accounting is an accounting method that records revenues and expenses only when cash is actually received or paid. This means transactions are only recognized when money changes hands, providing a straightforward view of a company’s cash flow. The simplicity of cash basis accounting makes it particularly beneficial for small businesses and individuals who may not require the complexity of other accounting methods.

In this method, when a business receives cash for a sale, it recognizes that sale as revenue at that point, regardless of when the sale was made. Similarly, expenses are recorded only when cash is paid out, making it easier to track how much money is coming in and going out at any given time. This approach contrasts with accrual basis accounting, which records revenues and expenses when they are incurred, regardless of cash transactions.

Understanding cash basis accounting is important for monitoring liquidity, as it directly reflects the actual cash position of the business, making it clear how much cash is available for operations and investments.