What is Cash Basis Accounting?

Cash Basis Accounting is a simple accounting method where revenues are recorded only when cash is received, and expenses are recorded only when cash is paid out. It directly tracks the flow of cash in and out of the business.

For Startups: While simple, this method is not permitted for registered companies in India and is not accepted by investors. It provides a poor picture of a company's actual performance. For example, a large annual subscription received in January would make January look extremely profitable, while the subsequent 11 months would show no revenue, which is misleading. The accrual method, which spreads the revenue over 12 months, is the required standard.

Example: A consultant completes a project in June but gets paid in August. Under the cash basis, the revenue is recorded in August. Under the accrual basis, it would be recorded in June when it was earned.