SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
Cash basis accounting records when cash actually changes hands in a transaction, providing a real-time view of your financial position that reflects the actual cash flow of a business or individual. While straightforward and easy to understand, it doesn’t account for any pending transactions that may be important to future cash flow and forecasting. Whether you opt for cash basis accounting or a different accounting method, working with a financial advisor could help you create a sustainable plan for your business or finances.
Cash basis accounting is a method of recording financial transactions when cash is received or paid out. This method is typically used by small businesses and individuals because it’s simpler to understand and manage. For example, a small business that uses cash basis accounting would only record a sale in its accounts when the customer has paid the invoice. This means revenue is recorded when it’s actually received, and expenses are recorded when they’re actually paid. It offers a clear picture of the actual cash flow at any given point in time without the need to project pending transactions that haven’t been settled.
Cash basis accounting indicates when money has actually been received and helps people keep track of their finances on the go. Here are six general ways you could benefit from this type of accounting:
-
Simple and easy to understand. It’s more straightforward to implement, making it ideal for small businesses and individuals.
-
No complex accounting adjustments needed. The cash basis method means you don’t have to make complicated financial accounting adjustments, like the accrual method does. This helps you more easily keep track of your financial health in real-time and also keep transaction errors to a minimum.
-
Easier to understand for non-accountants. The process is helpful to people or industries where non-accountants might be completing the bookkeeping tasks. It’s simple to learn and allows them to do the accounting for themselves.
-
Inexpensive. Fewer resources and less time are necessary to manage cash basis accounting. So, it’ll also cost less to maintain the practice than another method. For example, you might be able to do it yourself rather than figure out how much a CPA will cost your small business.
-
Reflects actual cash flow. It gives an accurate picture of cash flow in real-time since transactions are recorded only when funds shift hands.
-
Tax savings opportunities. You could potentially rely on cash-basis accounting methods to put off taxable liabilities until a future year. You can also better claim expenses against payments for tax purposes.
