# 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**](/content/terms/accrual-accounting/index.html)  
An accounting method that records revenue when earned and expenses when incurred, regardless of when cash changes hands.

[**Revenue Recognition**](/content/terms/revenue-recognition/index.html)  
The accounting principle determining when revenue is recorded, based on when it's earned rather than when cash is received.

[**Cash Flow**](/content/terms/cash-flow/index.html)  
The movement of money into and out of a business, showing actual liquidity rather than accounting profit.