In its simplest form, cash accounting is a system in which a company records expenses and revenues as the money changes hands.
When your client hands you cash, it is reported in your books. Likewise, when you pay a vendor, the expense is realized. Note that cash accounting has many names, so you may have heard it called cash-basis accounting, the cash method of accounting, or the cash receipts and disbursements method of accounting, among others.
If you remember our discussion of Bookkeeping for your SaaS Business, accounting is split into two categories: the cash accounting we discuss here and the more complicated, but also more accurate, accrual accounting.
Unlike cash accounting, accrual accounting recognizes revenues and expenses as they are posted using accounts receivable and accounts payable journal entries.
The table below gives you a quick and easy reference for the differences:
If you are having trouble keeping track of when your services are ordered vs. when invoices are paid, you should sign up for the Baremetrics free trial, and start monitoring your subscription revenue accurately and easily.
Cash Accounting Advantages and Disadvantages
1. Cash Accounting Advantages
There are many benefits to cash accounting, most of which are especially true for new and/or small businesses:
- Cash accounting is simple and intuitive. This is immensely important when day-to-day bookkeeping is done by someone who isn’t an accountant or specifically trained in bookkeeping. If you are a business of one, or at least operating lean enough that everyone wears multiple hats, then cash accounting will make your life easier.
- You can move up expenses at the end of the year and push revenue forward to minimize your tax burden. Note that some jurisdictions don’t like this, however, and will usually make larger businesses switch to an accrual system when they reach a revenue threshold.