A method of accounting whereby an entity recognizes its income and expenses on the general ledger on a cash basis- that is, at the time these items are actually received or incurred/ paid. According to cash basis accounting, transactions are recorded only when receipt or payment of cash is involved. For example, a retailer using cash-basis accounting only recognizes sales when customers pay for the products sold. Credit transactions involve no cash exchange at the time of transaction, and hence are not recorded at that time, but only when revenue generation process completes by receipt of cash (typically at the end of credit period).
This method of accounting usually suits small business and non-for-profits, but not large companies, as it doesn’t allow matching of costs and revenue (contrary to accrual basis accounting).
