Cash Basis
Definition
Cash basis accounting records revenue when cash is received and expenses when cash is paid. It is simpler than accrual but can show a misleading picture of profit.
Example
A business completes $5,000 of work in March but the customer pays in April. Under cash basis, the $5,000 is April revenue, not March revenue.
Why It Matters
Cash basis is easy to understand but does not match income and expenses to the period they belong to. This can make profit look higher or lower than it really was.