Cash Basis

AAA

DEFINITION of 'Cash Basis'

A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for).

INVESTOPEDIA EXPLAINS 'Cash Basis'

When transactions are recorded on a cash basis, they affect a company's books only once a completed exchange of value has occurred; therefore, cash basis accounting is less accurate than accrual accounting in the short term.

For example, let's say a construction company secures a major contract in a given year, but will only be paid for its efforts upon completion of the project. Using cash basis accounting, the company will only be able to recognize the revenue from its project at its completion, while it will record the project's expenses as they are being paid out. If the project's time span is greater than one year, the company's income statements will be misleading: the company will incur large losses one year and then great gains the next.

Cash basis accounting is simpler and cheaper to perform than accrual accounting, but it can make obtaining financing more difficult due to its inaccuracy.

RELATED TERMS
  1. Cookie Jar Accounting

    A disingenuous accounting practice in which periods of good financial ...
  2. Form 1099-INT

    The form issued by all payers of interest income to investors ...
  3. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  4. Financial Accounting

    The process of recording, summarizing and reporting the myriad ...
  5. Income Statement

    A financial statement that measures a company's financial performance ...
  6. Managerial Accounting

    The process of identifying, measuring, analyzing, interpreting, ...
Related Articles
  1. When are businesses required to use ...
    Investing

    When are businesses required to use ...

  2. Get A Tax Credit For Your Foreign Investments
    Taxes

    Get A Tax Credit For Your Foreign Investments

  3. Understanding The Income Statement
    Forex Education

    Understanding The Income Statement

  4. The Essentials Of Corporate Cash Flow ...
    Retirement

    The Essentials Of Corporate Cash Flow ...

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center