What is a Cash Basis?

The cash basis is a method of bookkeeping that focuses on the inflow of cash received and the outflow of cash paid in order to settle short-term obligations. A cash basis of accounting does not address the issue of debts that are paid in some manner other than the actual cash disbursement. While few businesses operate on a strictly cash basis today, the method has proven effective for companies that are attempting to recover from bankruptcy.

The cash basis process differs from the standard accrual basis mode of accounting that is more commonly employed today. With accrual based accounting procedures, the focus is on recording any type of revenue receipt, not just cash receipts. Also, the outflow of payments may be in a form other than cash and be recorded in an accrual. Accrual often includes such factors as sales that are made and accepted on accounts established for the use of a customer, as well as invoices that are connected to shipments made to clients that feature extended payment terms.

Cash basis works very simply, recording only cash spending and cash receipts. To a degree, many home budgets continue to operate on a more or less cash basis. Income from jobs or a home basis is recorded as the funds are received. As checks are cut to cover usual recurring or one-time expenses, these expenditures are recorded as cash expenses.

Households that wish to eliminate credit card debt usually employ a cash basis approach to funding the regular operations of the home. In this scenario, specific amounts are set aside each month to incrementally reduce credit card debt, while the remaining funds are used to cover necessary living expenses. The use of credit cards for recreation or other situations is discontinued. Instead, each purchase is paid for in cash, creating a transaction that is fully complete. People who are attempting to recover from a bankruptcy, or some situation that involved a temporary interruption in cash flow, will often find that operating on a cash basis can be a difficult approach, but one that ultimately helps to create a renewed sense of financial stability.