Glossary · Bookkeeping basics
Cash basis
Cash basis is an accounting method that records income when payment is received and expenses when they are paid. An invoice does not count as income until the customer's money arrives, and a bill does not count as an expense until you pay it. It is simple and tracks the bank closely.
Glossary / Cash basis · Also called cash accounting, cash method
How it works
Cash basis suits small service businesses with no inventory and few unpaid invoices at any time. The profit and loss roughly follows the bank account, which many owners find easier to understand.
The weakness is timing. A big job invoiced in December and paid in January shows up as January income, so December looks worse and January better than the work actually done. Cash-basis books also do not show what customers owe or what you owe suppliers, unless your software keeps those lists separately.
Worked example: A December invoice paid in January
A web designer invoices a client $5,000 on December 15. The client pays on January 10. The designer also buys a $1,200 laptop on a credit card on December 20 and pays the card in January.
On the cash basis, the $5,000 is January income. Whether the laptop counts when charged or when the card is paid depends on the tax rules: for US federal tax, an expense charged to a credit card is generally treated as paid on the charge date. On the accrual basis, the $5,000 is December income.
In the US and in Canada
In the United States
Many sole proprietors, partnerships and S corporations may use the cash method for federal tax. Some businesses must use accrual, including certain larger C corporations, so confirm with IRS Publication 538 or your preparer.
In Canada
The CRA generally requires the accrual method for business income. Farming and fishing income may be reported on the cash method. Many small businesses keep accrual books and simply read cash-basis reports for day-to-day decisions.
In AcboBooks
AcboBooks keeps the books with receivables and payables, then lets you run the Profit & Loss on the cash basis, which counts invoices and bills when they are paid. You do not keep two sets of books.
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Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.
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