Definition of Cash Basis Accounting

Cash basis accounting where the income is recorded when the cash is received irrespective of goods are sold or service is performed. Similarly, expenses are recorded when the cash is paid irrespective the benefit of the expense is received or not.

When cash is received in advance from a customer and no products or services are sold, the cash basis system will record the revenue under that period. Also, expenses like the electricity charges are not recorded in the period they are incurred and recorded as an expense in next month when it is paid.

The cash basis system is not operational these days as it has many flaws that are overcome by application of accrual-based accounting system.