Cash Basis Accounting
Definition
Recording revenue when cash comes in and expenses when cash goes out, regardless of when the sale or cost actually happened.
Want a deeper explanation?
Cash basis is simple, which is why many small businesses start there. For an inventory business, though, it badly distorts profit because inventory purchases and the sales they create land in different months.
You can keep tax reporting and management reporting on different methods with your CPA's guidance. Watch for: making buying or hiring decisions from a cash-basis P&L, because it often shows a loss in your best months.
Example
You buy $50,000 of inventory in November and sell it in January. Cash basis shows a big November loss and a big January profit.