Cash Accounting

Cash accounting is an accounting method where revenues and expenses are recorded only when cash is actually received or paid, as opposed to when they are incurred (as in accrual accounting). This approach is straightforward, making it popular among small businesses, freelancers, and sole proprietorships that operate on a cash basis.

Key Characteristics:

  • Income Recognition: Revenue is recorded when payment is received, regardless of when the sale was made.

  • Expense Recognition: Expenses are recognized when they are paid, not when they’re incurred.

  • No Accounts Receivable or Payable Tracking: Since transactions are only recorded when cash moves, there’s no need to track receivables or payables.

Advantages:

  • Simplicity in execution and record-keeping.

  • Better short-term cash visibility.

  • Lower administrative costs compared to accrual accounting.

Disadvantages:

  • Less accurate financial picture for companies with credit transactions.

  • Not compliant with generally accepted accounting principles (GAAP) for larger businesses.

  • Can misrepresent profitability, particularly if large expenses or receivables are deferred.

Example:

If a business invoices a client for AED 50,000 in June but receives the payment in July, the revenue would be recorded in July under cash accounting.