Cash Basis Accounting
Definition
Recording revenue when cash is received and expenses when cash is paid. Simple and a close proxy for cash position, but it ignores receivables, payables and inventory, so it can misstate profitability in any period. Eligibility is restricted by size and entity type in most tax systems.
Related Terms in Accounting Principles
Modified Cash Basis
A hybrid that keeps cash-basis treatment for most items while applying accrual treatment to selected ones, typically capitalising and depreciating fixed assets and recording long-term debt. Used for internal reporting; not a recognised framework for audited statements.
Accruals
The principle that transactions are recorded when they occur economically rather than when cash moves, and the entries that implement it. Accrual accounting is required under both GAAP and IFRS for general-purpose financial statements.
Matching Principle
The rule that expenses are recognised in the same period as the revenue they helped generate. It is why cost of goods sold moves with sales and why prepayments are released over the periods that benefit.
Materiality
The threshold above which an omission or error would change a reasonable users decision about the business. It governs how much precision and disclosure a given item justifies, and is judged in context rather than by a fixed percentage.
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