Cash Method
An accounting approach recording revenues when cash is received and expenses when paid, providing simplicity but potentially distorting financial performance measurement.
Cash Method
An accounting approach that records revenues when cash or payment is received and expenses when they are actually paid, regardless of when the related goods are delivered, services performed, or resources consumed.
For example, a small landscaping business using the cash method would record $2,000 in revenue when a customer pays for services, even if the work was performed in the previous month. Similarly, it would record $500 in equipment repair expenses when the bill is paid, not when the repairs were performed.
The cash method offers simplicity and clearly tracks cash flow, making it popular among small businesses, professional service firms, and sole proprietors. However, it can distort financial performance measurement by disconnecting economic activities from their financial recognition. This method is generally not permitted under GAAP for larger businesses, public companies, or entities with inventory, though many qualifying small businesses use it for tax purposes even while maintaining accrual records for management. Recent tax law changes have expanded eligibility for cash method tax reporting.