Cash Basis accounting is a method of recognizing revenue and expenses as cash hits or leaves the bank account, rather than when revenue is earned or expenses are incurred.
It stands in contrast to 📝Accrual Accounting, the basis required under 📝GAAP, which records revenue when earned and expenses when incurred and uses balance sheet accounts such as prepaid expenses and 📝Accrued Liability to hold the timing differences. On the cash basis no such accounts are needed, so the books track the bank balance closely, but results for any period swing with the timing of collections and payments.
Cash basis accounting is common among small, simple businesses because it is easy to keep. In the United States, tax rules limit who may use it: since the Tax Reform Act of 1986, C corporations and partnerships with C corporation partners generally cannot use the cash method unless they meet a small-business gross receipts test.