--- title: "What Is Cash Basis Accounting? Definition & Example | MCC" description: "A method that records income when you receive money and expenses when you pay them. A worked example and how it differs from accrual basis accounting." url: "https://mcc-solutionsnj.com/bookkeeping/glossary/cash-basis" --- Bookkeeping glossary # What is cash basis accounting? A method that records income when you receive money and expenses when you pay them. By [Matthew Coleman](/about), MCC Solutions [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## In plain English The cash basis is simple: income counts when cash arrives and expenses when cash leaves. It can make a month look better or worse than the work you did, because timing differs. Want a second pair of eyes on your books? [A free bookkeeping health check](/bookkeeping/health-check). Because of that, owners often track receivables and payables on the side or switch to accrual for management reports. Ask your preparer which method applies to your tax return. ## Why it matters The cash basis is easy to follow because your books track your bank account closely. For a sole proprietor or a small service business, that simplicity can mean fewer entries and a profit figure that is easy to explain. You know exactly what came in and what went out. The tradeoff is timing. If you pay a large bill on the first of the month instead of the thirtieth, your profit shifts between months even though nothing about the business changed. Owners who rely only on cash reports can underestimate what they owe and overestimate what they earned. ## Worked example You complete a $5,000 project in March but are paid April 12. On the cash basis, the $5,000 is April income. A $700 March rent bill paid April 1 is an April expense. ## How to handle it - Record each deposit as income on the date it hits the bank, with the customer and service noted. - Record each payment as an expense on the date it clears or is paid, using the correct category. - If you still send invoices, run the profit and loss with the report basis set to cash so open invoices are excluded. - Keep a simple list of unpaid customer invoices and unpaid bills on the side so you do not lose sight of them. - Reconcile the bank and card accounts monthly, since the cash basis depends on those records being complete. ## Common mistakes - Treating a loan deposit as income, which inflates profit even under the cash basis because borrowed money is not earned. - Recording the full credit card payment as one expense instead of the individual purchases, which hides what the money was spent on. - Ignoring unpaid bills because they are not in the books yet, then being surprised when several come due at once. - Assuming the cash basis means inventory or equipment can always be expensed when paid, which may not match the tax rules for your business. ## Not the same as: Accrual basis accounting Cash basis counts income and expenses when money moves. Accrual counts them when the work is done or the cost is incurred, regardless of when cash changes hands. [See Accrual basis accounting](/bookkeeping/glossary/accrual-basis). ## Go deeper - [Accrued Expenses and Accrued Revenue Explained](/bookkeeping/guides/accrued-expenses-and-revenue-explained): Understand accruals: how to record expenses you owe but have not been billed for, and income earned but not invoiced, with simple examples. ## Related terms - [Cash flow](/bookkeeping/glossary/cash-flow): The movement of money into and out of a business over a period. - [Chargeback](/bookkeeping/glossary/chargeback): A reversal of a card payment forced by the cardholder's bank, usually after a dispute. - [Capital contribution](/bookkeeping/glossary/capital-contribution): Money or property an owner puts into a business in exchange for an ownership stake, not as a loan. ## Common questions **What is cash basis accounting?** A method that records income when you receive money and expenses when you pay them. **Can you give an example of cash basis accounting?** You complete a $5,000 project in March but are paid April 12. On the cash basis, the $5,000 is April income. A $700 March rent bill paid April 1 is an April expense. **Do credit card purchases count when I buy or when I pay the card?** Under common cash basis practice, a card purchase is usually treated as paid on the purchase date because the card company paid the vendor. Confirm the treatment for your return with your accountant. **Can I switch from cash to accrual later?** Your books can be converted, and software can often report both ways. Changing the method used on a tax return can involve a formal process, so check with your accountant or the IRS first. General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional. Need help? [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. 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It does not do payroll or sales tax filing. The free download records up to 60 entries. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) [Download it free](/tools/pro/trial/mccBooks) [Compare the three apps](/software) ## Rather have us keep the books? Ask for a quote. [Get a Quote](/bookkeeping/#interest)[Call (908) 444-6373](tel:+19084446373)