Documentation -> Accounting/Bookkeeping -> Prerequisite Knowledge -> Cash Method/Basis

The Cash Accounting Method or Basis specifies that one record incomes when they are received (more specifically, when they go into the receiving account) and to record expenses when they are paid (leave the paying account). The Cash Accounting Method/Basis has some benefits and drawbacks/limitations that we will highlight below.

Benefits

The Cash Method is a simple and quick method to use for keeping up with incomes and expenses. Simple because there is only the rule above as to when to enter the transaction. Quick, because the entry itself is simper with the cash basis. For a received payment you would simply debit cash and credit sales, for instance.

The Cash Method also gives an accurate account of cash on hand at any given time.

Using the Cash Basis, an organization could reduce it's taxable income for the year by paying more expenses at the end of the year.

Drawbacks/Limitations

Could give a misleading picture of the overall financial health of the company. Since revenue isn't recorded until it is actually received, work for several clients may have been completed with expenses already having been deducted from the books, but payments wouldn't be recorded yet. Alternatively, the payments from several past jobs could be received all at once, with the expenses having already been recorded in the previous month or quarter, making the books look unbalanced in the other direction.

The Cash Method is also more vulnerable to manipulation as a company could delay depositing checks or paying debts to skew the financial picture.

Lenders will likely expect or require that the Accrual Method be used. A certified audit by a CPA requires the accrual basis and The IRS requires some businesses to use accrual, as well. see pub 538 and this for more info on that.