Accruals & Timing
Cash Basis Accounting
An accounting method that records revenue when cash is received and expenses when cash is paid — nothing counts until money moves.
Cash basis accounting is the intuitive model: revenue happens when a payment lands, expenses happen when a payment leaves. There are no receivables, no payables, no accruals, no deferred revenue — the bank statement and the P&L tell the same story because they're measuring the same event. For simple businesses with no inventory and no financing, it's genuinely sufficient, and it's the default for many very small companies and tax elections (the IRS generally requires accrual above a revenue threshold or for inventory-based businesses).
Its weakness is timing distortion. Cash basis reports can swing wildly on when payments happen rather than when work happened: a brutal month where three enterprise customers paid late can show a loss despite strong delivery, and a month where annual contracts renew up front can show a windfall that includes twelve months of future service. Founders using cash basis must remember the statements describe cash flow, not performance — which is exactly the confusion that accrual accounting was built to solve.
Example
You complete a $9,000 project in February but the client pays in April. Cash basis books $9,000 of revenue in April and shows February as pure cost. Accrual books the revenue in February, when the work was actually done — and records a receivable until April's payment clears.
Common questions
Can a startup use cash basis accounting?
If you have no inventory and stay under the IRS gross-receipts threshold, yes — but most funded startups choose accrual from day one because investors, boards, and eventual auditors expect GAAP financials, and subscription revenue makes cash basis actively misleading.
Why does cash basis make profitable companies look broke?
Because it only counts payments received. Deliver $50,000 of work in a month on net-60 terms and cash basis shows zero revenue — the P&L looks empty while your team has been working full-tilt. The money eventually arrives; the reporting period just never matches the effort.
Practice this in the game
Accrual World turns concepts like these into playable drills. Pick the account, pick debit or credit, and get instant feedback. Free, no signup.
Play now