What Is the Cash Method?
With the cash basis of accounting, you record income as it’s received and expenses as they’re paid. This does not take into account any accounts receivable or payable, as it only applies to payments from clients when the cash is in hand, and expenses when the transaction clears your bank account.
For example, if you invoice a client for $1,000 on March 1 and receive payment on April 15, you would record the income in April’s bookkeeping. This is when the money was received and in hand.
Many small business owners choose the cash method of accounting because it’s a simplified bookkeeping process. It’s easy to track money as it moves in and out of your bank account because there’s no need to record receivables or payables.
Additionally, your small business doesn’t have to pay income tax on any revenue until the moment it’s deposited into your bank account.
One downside to using the cash basis of accounting is that it can produce an inaccurate overall picture of your finances. Since it doesn’t account for all incoming revenue or outgoing expenses, it can lead you to believe you’re having a very high cash-flow month, when in actuality this is a result of last month’s work.
For more in-depth information, see our article about the cash method.