Cash Basis Accounting is a simple method of accounting often used by small businesses and sole proprietors. Under this method, revenues are recorded only when cash is received, and expenses are recorded only when cash is paid. This contrasts with Accrual Accounting, where revenues and expenses are recognized when incurred, regardless of when cash changes hands. For example, under the cash basis, if a service is performed in November but the payment is made in December, the revenue is recorded in December.

This approach is straightforward, making it easier for businesses without extensive accounting systems to monitor their cash flow. However, this method may not always give a complete picture of a business's financial position. For instance, outstanding invoices (accounts receivable) or liabilities (accounts payable) won’t be captured until the cash transaction is made. Due to this limitation, larger businesses or entities required by regulations often use Accrual Accounting instead. Examples of related terms include Accounts Payable and Accounts Receivable, which are more relevant in Accrual Accounting systems and not Cash Basis Accounting.