What is Cash Basis Accounting?

Cash Basis Accounting (Definition)

Cash basis accounting is a straightforward and effective method of keeping track of financial transactions for small and start-up businesses. Recording payments as either revenue or expenditure when they are received and given is necessary. It is particularly beneficial for organisations that do not maintain an inventory. Using the cash basis accounting simplifies general accounting because all transactions are recorded in terms of money received or paid. The cash basis accounting approach also makes it simpler to keep tabs on a company's cash flow. A disadvantage of this method is that it can exaggerate the health of a company – a company may be cash-rich, but they could have a large amount of accounts payables that are more substantial than the cash available.

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