Which accounting method recognizes revenues and expenses based on actual cash transactions?

The cash basis accounting method recognizes revenues and expenses when actual cash transactions occur. This means that revenue is recorded when cash is received, and expenses are recorded when cash is paid out. The primary focus of this method is on cash flow, providing a clear picture of the cash available at any given time.

This approach is particularly useful for small businesses or sole proprietors who want to keep their accounting straightforward and are mainly concerned with cash rather than receivables or payables. It allows business owners to easily track their cash situation without needing complex accounting adjustments related to accrual transactions.

In contrast, accrual basis accounting records revenues and expenses when they are earned or incurred, regardless of when cash changes hands. Modified cash basis accounting combines elements of both cash and accrual methods, recognizing certain types of transactions on an accrual basis while still using cash basis for others. Payable basis accounting, while not a standard term commonly recognized in accounting practices, implies a focus on payables, which is not relevant to the question of cash transactions.