What is the cash basis of accounting?

The cash basis of accounting is characterized by recording revenues and expenses at the time cash is actually received or paid. This means that income is recognized only when cash is received from sales or services, and expenses are recognized only when cash payments are made. This method is straightforward and aligns cash flows with the timing of transactions, making it easy to track the actual liquidity of a business.

The essence of this accounting method is its focus on the actual movement of cash, which makes it particularly appealing for small businesses or individuals who need a simple and clear view of their cash situation. It differs from the accrual basis of accounting, where revenues and expenses are recorded when they are earned or incurred regardless of cash transactions.