Cash Accounting

What is 'Cash Accounting'

Cash accounting is an accounting method where receipts are recorded during the period they are received, and expenses are recorded in the period in which they are actually paid. Cash accounting is one of the two forms of accounting. The other is accrual accounting, where revenue and expenses are recorded when they are incurred. Small businesses often use cash accounting because it is simpler and more straightforward, and it provides a clear picture of how much money the business actually has on hand. Corporations, however, are required to use accrual accounting under generally accepted accounting principles.

Also called cash-basis accounting.

BREAKING DOWN 'Cash Accounting'

Under a cash accounting system, if Company A receives $10,000 for the sale of 10 computers from Company B on Nov. 2, the accountant records the sale as having occurred on Nov. 2. The fact that Company B placed the order for the computers on Oct. 5 is irrelevant, because it did not pay for them until they were delivered on Nov. 2. Under accrual accounting, by contrast, the accountant would have recorded Company A as having received the $10,000 on Oct. 5, even though no cash had changed hands yet.

Likewise, under cash accounting, companies record expenses when they actually pay them, not when they incur them. If Company C hires Company D for pest control on Jan. 15 but doesn't pay the invoice until Feb. 15, the expense would not be recognized until Feb. 15 under cash accounting. Under accrual accounting, however, the expense would be recorded in the books on Jan. 15.

A drawback of cash accounting is that it may not provide an accurate picture of liabilities that have been incurred but not yet paid for, so the business might appear to be better off than it really is. At the same time, cash accounting means that a business that has just completed a large job for which it is awaiting payment may appear to be less successful than it really is, because it has expended the materials and labor for the job but not yet reaped the rewards.

RELATED TERMS
  1. Cash Basis

    A major accounting method that recognizes revenues and expenses ...
  2. Accrue

    The ability for something to accumulate over time. In finance, ...
  3. Accruals

    Accounts on a balance sheet that represent liabilities and non-cash-based ...
  4. Modified Accrual Accounting

    An accounting method commonly used by government agencies that ...
  5. Modified Cash Basis

    An accounting method that combines elements of the two major ...
  6. Cash Cost

    A cash basis accounting cost recognition process that classifies ...
Related Articles
  1. Investing

    What is Cash Basis Accounting?

    Cash basis accounting recognizes revenues and expenses at the time cash is paid or received.
  2. Investing

    What does Accrual Mean?

    In accrual-based accounting, transactions are recorded on the books as they occur, even if payment has not yet been received or made. Accruals represent liabilities and non-cash-based assets. ...
  3. Investing

    How To Decipher Accrual Accounting

    Accrual accounting is an important method of measuring the performance and position of a company. Learn more on how its used.
  4. Investing

    Accounting Basics: The Basics

    By Bob Schneider The Difference Between Accounting and Bookkeeping Bookkeeping is an unglamorous but essential part of accounting. It is the recording of all the economic activity of an organization ...
  5. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  6. Investing

    Earnings Quality: Why Aren't All Earnings Equal?

    By Tim Keefe,CFA (Contact Author | Biography)One company's reported earnings are not of the same exact quality as another's because each management team uses its own judgment when recording business ...
  7. Investing

    What Is A Trading Account?

    A trading account enables an investor to buy and sell securities.
  8. Investing

    Earnings Quality: Investigating The Financing Of Accruals

    By Tim Keefe,CFA (Contact Author | Biography)Along with the time-series plots above, which illustrated scenarios where a firm experiences a large jump for two operating-assets accruals, investigation ...
  9. Retirement

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  10. Investing

    Cash Flow On Steroids: Why Companies Cheat

    Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.
RELATED FAQS
  1. When are expenses and revenues counted in accrual accounting?

    Take an in-depth look at the treatment of revenues and expenses within the accrual method of accounting and learn why many ... Read Answer >>
  2. How does accrual accounting differ from cash basis accounting?

    The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. ... Read Answer >>
  3. What is accrual accounting used for in finance?

    Read about the accrual method of accounting, its uses and rules, and why it is considered so important for investors, lenders ... Read Answer >>
  4. When are businesses required to use accrual accounting?

    Determine when the accrual accounting method must be used instead of cash accounting. Most businesses use accrual accounting ... Read Answer >>
  5. When is revenue recognized under accrual accounting?

    Discover how to report revenue under the accrual method of accounting and why a firm recognizes revenue even when cash has ... Read Answer >>
  6. Why does GAAP require accrual basis rather than cash accounting?

    Discover why GAAP requires the accrual basis for accounting rather than the cash basis, and learn why it is important for ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center