What is cash-basis accounting?

Definition

Cash-basis accounting dates every sale and every cost to the day money hits or leaves the bank. On the books, the Income Statement follows that bank date, not the day the work happened.

This is a method for dating the whole set of statements. It is not a special journal entry and not a separate cash account.

Where it shows up

Balance sheet: Related to balances that exist only because cash already moved.

P&L: Related to revenue and expense dated to the cash date.

Cash flow: Related to the books tracking cash movement as the event.

See also: Modified Cash Basis · Cash Flow From Operations · Financial Statement Package

When you look at the Balance Sheet under this method, you mostly see balances that exist because cash already moved. Receivables for unpaid sales and unpaid vendor bills are usually missing.

The Income Statement dates sales to the deposit and costs to the payment. A card swipe that settles next month is next month's revenue here.

Cash flow from operations and this method tell a similar story. The books treat the cash movement as the event, so profit and cash stay closer together.

The Financial Statement Package still includes a Balance Sheet and an Income Statement. Those pages are thinner because they skip items cash has not yet touched.

How it works

A sale is recorded when the money lands. Card batches, checks, and cash in the till are the earning event under this method.

How cash-basis books date activity:

• Record a sale when the deposit lands, not when the work happened
• Record a cost when the shop pays, not when the goods or services were used
• Treat the bank statement as the main source document
• Skip accruals and deferrals; the cash date is the recognition date
• Read net income as cash-dated leftover, not as work-dated profit

A cost is recorded when the shop pays. Supplies used this month are not this month's expense if the vendor is paid next month.

The bank statement is the main source document. If the bank does not show the movement, the books usually do not show the income or the cost.

Stay on the method. Contrast with accrual-basis books is useful, but this page is the cash date, not a tour of every earned-but-unpaid item.

Accrual-basis books would have recorded the work in the month it happened. This method waits for the bank.

A deferral is not a cash-basis tool. Deferrals wait to recognize after cash moved; this method treats the cash date as the recognition date.

Net income under this method can swing with deposits and payments. A heavy collection week can look like a strong month even if the shop was slower.

Readers who want the work dated to the period it happened should not treat this leftover as that reading. This leftover is dated to cash.

Example

Mill Street Bakery sells $8,400 of card sales in June. The processor batch does not hit the bank until July 2.

Under this method, June does not record the $8,400. July records it when the deposit lands.

June also used $2,100 of flour that will be paid in July. That cost is July expense here, because that is when cash leaves.

June's Income Statement can look light even though the shop was busy. July then shows both the settled sales and the flour payment.

If the owner reads June and thinks the shop was slow, the cash date is the reason. The loaves left in June; the bank moved in July.

No extra entry is needed to wait for the batch. The books simply follow the deposit.

Common mix-ups

Cash-basis accounting is not the same as cash from operations on an accrual set of statements. Cash from operations starts from accrual profit and adjusts; this method dates the Income Statement itself to cash.

Cash-basis accounting is not the same as modified cash basis. The hybrid still capitalizes equipment and may accrue a few items; this method stays with cash for almost everything.

Cash-basis accounting is not the same as a bank balance. The method dates income and expense to cash; it does not replace a bank reconciliation.

Related terms

• Accrual Basis Accounting: Recording revenue when earned and expenses when incurred.
• Modified Cash Basis: A hybrid that records most items on a cash basis but capitalizes and accrues a few.
• Cash Flow From Operations: Cash generated or used by the day-to-day running of the business.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Bank Statement: The bank's period record of every transaction and the ending balance.
• Financial Statement Package: The bundled set of statements and schedules delivered after a close.
• Deferral: Pushing recognition of a cost or revenue to a later period than the cash movement.
• Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.