Cash Basis Accounting

What is cash basis accounting?

Cash basis accounting records transactions when money actually changes hands. You record income when the client pays you, not when you send the invoice. You record expenses when you pay the bill, not when you receive it. It's the simpler of the two main accounting methods.

Most small businesses start with cash basis because it's straightforward and matches how they naturally think about money.

Cash basis example

Here's how it works in practice:

• You complete a job in December — No entry yet
• You send the invoice in December — Still no entry
• Client pays in January — NOW you record the income (in January)

The income counts in the period when you actually received the cash, not when you earned it.

Pros and cons

Advantages: Simple to understand, easy to manage, clear picture of actual cash on hand. Disadvantages: Can misrepresent your financial position—you might look profitable in one month and broke the next based solely on payment timing, not actual business activity.