Glossary · Accounting
Cash basis accounting
Also called Cash accounting, Cash method
Cash basis accounting records revenue when payment is received and expenses when they are paid, not when invoices are issued.
Under the cash basis, an invoice isn’t income until the money arrives. It is simpler than accrual accounting and closer to what is in the bank, which is why many sole traders and small businesses use it where tax rules allow.
One consequence matters for bad debts: because unpaid invoices were never counted as income, there is nothing to deduct when one goes unpaid. In the US, for example, a cash-basis business generally can’t claim a bad debt deduction for unpaid invoices.
Cash basis accounts don’t show receivables on the books, so a business using it still needs a separate view of who owes what — or overdue invoices simply disappear from sight.
Example
A cash-basis freelancer invoices €8,000 in March and is paid in May. The €8,000 is May income. If it had never been paid, it would never have been income at all.