Cash basis

Definition

Cash basis is an accounting method where revenues and expenses are recorded only when cash is received or paid. It contrasts with the accrual basis, which records income and expenses when they are incurred.

5 Must Know Facts For Your Next Test

1. Cash basis accounting is typically used by small businesses and individuals due to its simplicity.
2. Under cash basis, revenues are recognized when payment is actually received, not when earned.
3. Expenses are recorded only when they are paid, regardless of when they were incurred.
4. This method does not conform to Generally Accepted Accounting Principles (GAAP), making it less suitable for larger businesses.
5. The Statement of Cash Flows can be simpler to prepare under the cash basis since it directly reflects cash transactions.

Review Questions

• How does cash basis accounting differ from accrual basis accounting?
• Why might a small business prefer to use cash basis accounting?
• What impact does using the cash basis have on the preparation of financial statements?

Related terms

Accrual Basis:

An accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when the cash transaction occurs.

Statement of Cash Flows:

A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents.

Revenue Recognition Principle:

An accounting principle that dictates revenue should be recognized in the period it is earned, regardless of when the payment is received.