In accounting, cash-basis accounting is a method of recording revenue and expenses only when payment is received or made. This means that revenues and expenses are not recognized until cash is actually received or paid out. For example, if a company sells a product on credit, the revenue from that sale would not be recorded in the accounting records until the customer pays for the product.
This method of accounting is often used by small businesses because it is simpler than accrual accounting, which requires businesses to record revenue and expenses when they occur, regardless of when payment is received or made. Cash-basis accounting can also give business owners a better idea of their current financial position because it only includes transactions that have actually been completed.
However, there are some disadvantages to using cash-basis accounting. One disadvantage is that it can create timing differences between when revenue is earned and when it is actually received, which can make financial statements appear artificially high or low. Another disadvantage is that expenses may not be recorded in the period in which they were actually incurred, which can make it difficult to track and manage expenses.
Overall, cash-basis accounting is a simpler way of accounting for revenue and expenses, but it has some drawbacks that businesses should be aware of.