Cash Basis Accounting
Definition
Cash basis accounting records revenue when cash is received and expenses when cash is paid, regardless of when goods or services are actually delivered. It is simpler than accrual accounting and common among very small businesses, but it can distort financial performance for subscription companies.
Overview
Cash basis accounting is the simplest accounting method: money in is revenue, money out is expense. There is no tracking of receivables, payables, or deferred revenue. The books reflect exactly what the bank account shows, making it straightforward for very early-stage companies or solo founders.
The limitation of cash basis is that it can severely distort financial performance for subscription businesses. An annual prepayment of $24,000 appears as a massive revenue spike in one month under cash basis, while the following eleven months show zero revenue from that customer. This makes trend analysis, MRR calculations, and financial forecasting unreliable.
Most startups begin with cash-basis accounting for simplicity and transition to accrual accounting as they grow. The transition is typically triggered by one of three events: raising institutional funding (investors expect GAAP-compliant financials), exceeding revenue thresholds that require accrual under tax rules, or needing accurate SaaS metrics that require proper revenue recognition.
Example
Under cash basis, if a startup pays $6,000 for 6 months of office rent in January, the full $6,000 is recorded as an expense in January. No portion is deferred to future months.
Related Terms
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