Cash Basis Accounting

Quick Definition

An accounting method that records transactions only when cash is received or paid out.

What is Cash Basis Accounting?

Cash basis accounting records revenue when cash is received and expenses when cash is paid. It ignores when the economic activity actually occurred.

Why Cash Basis Matters

Cash basis is simpler and shows exactly how much cash you have. For very early-stage startups or simple businesses, it may be sufficient. Many founders start with cash basis because it matches their bank statements intuitively.

However, cash basis creates distortions. A SaaS company that collects annual payments upfront would show huge revenue spikes followed by months of near-zero revenue, even though the business is stable.

When to Use Cash Basis

Cash basis works for simple businesses with immediate delivery and payment. Once you have recurring revenue, multi-period contracts, or investor reporting needs, you should switch to accrual.

Formula

Revenue = Cash received from customers
Expenses = Cash paid to vendors and employees

Example

Your ecommerce business in December:

• Sells $50K of products (customers pay with credit cards)
• Orders $30K inventory (pays supplier in January)

Under cash basis:

• Record $50K revenue when payment processor deposits funds
• Record $0 inventory expense until payment in January

Your December looks highly profitable, but January will show a big expense hit for inventory already sold.

Related Terms

Accrual Accounting
An accounting method that records revenue when earned and expenses when incurred, regardless of when cash changes hands.

Revenue Recognition
The accounting principle determining when revenue is recorded, based on when it's earned rather than when cash is received.

Cash Flow
The movement of money into and out of a business, showing actual liquidity rather than accounting profit.