2 min read
Definition
The cash basis records income when received and expenses when paid, following the bank account rather than when income is earned or costs incurred. It is available to the smallest unincorporated businesses but not to companies.
In plain terms
It is the simplest way to keep accounts — just track money in and out. But it can distort profit, because a big unpaid invoice at year end simply does not appear.
Why it matters for your company
Companies must use the accruals basis, not the cash basis, so directors need to understand why their reported profit differs from their cash. Knowing the distinction explains why a profitable company can still be short of cash.
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