Cash Basis Accounting
An accounting method that records revenues when cash is received and expenses when cash is paid, regardless of when they are earned or incurred.
What is Cash Basis Accounting?
Cash basis accounting recognizes revenues and expenses only when cash changes hands — not when goods are delivered, services rendered, or obligations incurred. It is simpler to maintain than accrual accounting and provides a clear picture of actual cash flows. However, it can produce misleading financial statements: a company might report high income in months when collections are strong and losses when invoices go unpaid, even if underlying operations are stable. The IRS generally allows small businesses with average annual gross receipts below $30 million (as of 2026) to use cash basis. Public companies and those required to follow GAAP must use accrual accounting. Cash basis is most common among sole proprietors, freelancers, and small service businesses.
Example
A freelance consultant invoices $10,000 in December 2025 but is paid in January 2026. Under cash basis accounting, the $10,000 is recorded as 2026 revenue. Under accrual accounting, it is recognized as 2025 revenue — the year the service was provided — regardless of when payment arrives.
Source: IRS — Accounting Periods and Methods, Publication 538