Cash Basis Accounting

Cash basis accounting records revenues and expenses only when cash is received or paid.

Explanation:
This method is simple and used by small businesses.

• Revenue is recorded when cash is received.
• Expenses are recorded when cash is paid.
  No accounts receivable or accounts payable are recognized.

Example:
If a client pays in January for a service delivered in December, the revenue is recorded in January.

Importance:
It offers a simple view of cash flow but doesn’t show the full financial picture.

Common Confusion:
Often confused with accrual accounting, which records income/expenses when earned/incurred.