---
title: "What is cash basis accounting?"
description: "Cash Basis Accounting explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/cash-basis-accounting/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is cash basis accounting?

Glossary

Cash basis accounting is a method of recording income when cash is actually received and expenses when cash is actually paid, rather than when they are earned or incurred, regardless of what an invoice or bill might say.

Updated September 2026

## How cash basis accounting works

Under cash basis, a sale is not recorded as revenue until the customer's payment actually arrives, and a bill is not recorded as an expense until it is actually paid, regardless of when the invoice was issued or the work was originally done. This makes cash basis simple to follow, since the books simply track cash in and cash out as it happens.

Because it ignores timing differences like unpaid invoices or unbilled work still in progress, cash basis can make a period look considerably better or worse than the underlying business activity actually was. Many small businesses use it for simplicity and for tax purposes, while switching to accrual for internal management reporting once they need a more accurate operating picture.

## Example

A consultant invoices a client $6,000 in late December for work completed that same month but is not actually paid until mid-January. Under cash basis accounting, that $6,000 counts as January income, not December, even though the work and the invoice both happened in December. Her December income statement shows no revenue from that engagement at all as a result.

## Cash Basis Accounting in QuickBooks Online vs Xero

QuickBooks Online lets a business toggle most reports between cash and accrual basis without changing the underlying transactions recorded. Xero offers the same option, letting reports be viewed on either basis depending on the purpose, tax filing versus internal management review.

## Common mistakes

- A business on cash basis assumes its income statement reflects how much work was actually done, when it only reflects when cash happened to arrive.
- Cash basis books are used for a loan application that requires accrual-based statements, creating a mismatch the lender then has to sort out.
- A seasonal dip in cash receipts is mistaken for a genuine slowdown in business activity, when unpaid invoices are simply sitting uncollected that month.

## Why it matters

Cash basis accounting is simple and often fine for tax purposes, but it can make a period look far better or worse than the underlying business activity actually was. For small business owners, relying on cash basis numbers alone can obscure a slowdown in sales or hide unbilled work that will show up as cash later. Understanding the difference between cash basis and accrual matters most when applying for financing or reviewing true performance.

## Related terms

- [Accrual Basis Accounting](https://ledgerbpo.com/glossary/accrual-basis-accounting/)
- [Cash Flow Statement](https://ledgerbpo.com/glossary/cash-flow-statement/)
- [Financial Statements](https://ledgerbpo.com/glossary/financial-statements/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles cash basis accounting

We keep your books on the basis that fits your needs, cash for simplicity and tax filing, or accrual for a more accurate management view, and make sure reports are clearly labeled so nothing gets misread later.

[Bookkeeping done every week, not every quarter](https://ledgerbpo.com/services/bookkeeping/)

Next step

## Books closed. Invoices paid. Every month.

Tell us what is going on with your books or billing. You will hear from a named person within 1 business day, with a custom quote and a plan for the first close.

- Reply from a named person within 1 business day
- No setup fee, month-to-month
- Your software, your data, no lock-in

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Source: https://ledgerbpo.com/glossary/cash-basis-accounting/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt