Cash basis accounting explained
On the cash basis, income counts when money reaches your account and expenses count when money leaves it. An invoice you sent but haven’t been paid for isn’t income yet; a bill you’ve received but haven’t paid isn’t an expense yet.
It’s simple and it tracks what is in the bank, which is why many sole proprietors and small service businesses keep their books and file their taxes this way. The trade-off is timing: a big customer payment can make one month look excellent and the next look poor, even if the work was spread evenly. Cash-basis reports also don’t show what customers owe you or what you owe vendors.
Whether you can file on the cash basis depends on your business; IRS Publication 538 covers the rules, and your tax preparer can confirm. Plenty of owners look at both: cash for taxes and cash planning, accrual for how the business is really doing.
Example: the same March on the cash basis
A studio invoices $5,000 in March and is paid on April 10. It receives a $1,200 March supplier bill and pays it April 5, and pays $800 March rent in March.
| March | April | |
|---|---|---|
| Income received | $0 | $5,000 |
| Supplier bill paid | $0 | − $1,200 |
| Rent paid | − $800 | $0 |
| Profit, cash basis | − $800 | $3,800 |
On the accrual basis, March would show a $3,000 profit and April none of these amounts. The work and costs are the same; only the timing differs.
Where you’ll see it in fiscal50
fiscal50 keeps one set of books and reports them either way. The Balance Sheet, Income Statement and Trial Balance switch between Cash and Accrual with one click, and reports open with the accounting method set for your company.
Ledgers have the same choice: in a vendor ledger, Cash shows transactions when money is paid, and Accrual shows expenses when they are incurred.