Cash Method of Accounting
What is the Cash Method of Accounting?
Under the cash method of accounting, income and expenses are only recognized when they are actually collected and paid.
![cba1](https://seeaccountingnow.online/wp-content/uploads/2020/01/cba1.jpg)
How it Works
The cash basis of accounting is used to calculate tax at period-end.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba2-1.jpg)
It is mainly used for small service businesses that don’t have inventory.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba3-1.jpg)
Revenue
A business will make sales during an accounting period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba4.jpg)
Some of these sales will be made on a cash basis.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba5.jpg)
In this case, money earned from sales will be deposited in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba6.jpg)
At the same time, the business will make sales on credit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba7.jpg)
Here, the money owed from the sales is recorded in customer accounts.
![cba8](https://seeaccountingnow.online/wp-content/uploads/2021/06/cba8.jpg)
Later on, customers pay what they owe.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba9.jpg)
This is when the money from credit sales will be deposited in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba10.jpg)
When using the cash basis of accounting, you only recognize revenue where the cash has been received during the accounting period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba11.jpg)
So you recognize any money received from the current period’s cash sales.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba12.jpg)
You also recognize any customer payments made during the current period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba13.jpg)
Together, this will show the total of cash revenue during the period.
![cba14.1](https://seeaccountingnow.online/wp-content/uploads/2020/11/cba14.1.jpg)
Expenses
A business will also incur expenses during an accounting period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba15.jpg)
The business will pay for some of these expenses now.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba16.jpg)
That is, they take money out of the bank and use it to pay for expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba17.jpg)
The business will also buy some goods and services on a credit basis.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba18.jpg)
This means, the goods or services will be provided by suppliers.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba19.jpg)
Later on, the business will pay the suppliers.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba20.jpg)
As with revenue, you only recognize cash actually paid during the accounting period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba11.jpg)
So you recognize any cash payments made during the period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba22.jpg)
You also recognize any payments the business makes to suppliers.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba23.jpg)
Together, this will show the total of cash paid for expenses during the period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/cba24.jpg)
© R.J. Hickman 2020