Cash basis accounting is a method of recording revenue and expenses only when cash is received or paid out. This means that transactions are recognized based on their actual cash flow, rather than when they are earned or incurred.
Key points about cash basis accounting:
– Revenue Recognition: Revenue is only recorded when cash is received from customers.
– Expense Recognition: Expenses are only recorded when cash is paid out.
– No Accruals or Deferrals: Accruals (expenses incurred but not yet paid) and deferrals (income received but not yet earned) are not used.
– Simplicity: Cash-based accounting is often simpler to understand and manage, especially for small businesses.
Example:
– Sale of a product: If a customer purchases a product on credit, the sale would not be recorded under cash basis accounting until the cash is received from the customer.
– Purchase of inventory: If a business purchases inventory on credit, the expense would not be recorded until the cash is paid to the supplier.
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