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. Accrual Accounting

    Accrual accounting is an accounting method that measures the ...
  2. Accruals

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

    An accounting method commonly used by government agencies that ...
  4. Accounting Method

    The method by which income and expenses are reported for taxation ...
  5. Modified Cash Basis

    An accounting method that combines elements of the two major ...
  6. Chart Of Accounts

    A listing of each account a company owns, along with the account ...
Related Articles
  1. Professionals

    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. Markets

    Earnings Quality: Analyzing Specific Accrual Accounts

    By Tim Keefe,CFA (Contact Author | Biography)Not all accrual accounts are subject to the same management manipulation, and some accruals are worth more attention than others. Recall Figure 6 ...
  4. Forex Education

    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. Executive Compensation

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  6. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  7. 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.
  8. Fundamental Analysis

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  9. Savings

    Explaining Checking Accounts

    A checking account is an account at a financial institution, usually a bank, that allows for deposits and withdrawals.
  10. Economics

    Explaining Double Entry Accounting

    Double entry is an accounting and bookkeeping term describing the method of entering transactions into the accounting records.
RELATED FAQS
  1. What is the difference between accrual accounting and cash accounting?

    Understand the differences between the two basic methods of accounting commonly used by businesses: cash accounting and accrual ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. When is accrual accounting more useful than cash accounting?

    Learn when accrual accounting is more useful than cash accounting when trying to determine a company's performance over a ... 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. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center