Cash Basis Accounting

Understand cash basis accounting, how it works, its advantages, and real-world examples of its use.
OPEN FD
Cash Basis Accounting
OPEN FD
4 min
17 September 2025

Cash basis accounting is a method where revenues and expenses are recorded only when cash is received or paid. Unlike accrual accounting—which records transactions when they are incurred—this method focuses purely on real-time cash flow.

It is especially popular with freelancers, small businesses, and sole proprietors who want to avoid complex bookkeeping. While it makes financial tracking simple, it may not always give a full picture of business performance.

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Example of cash basis accounting

Consider a small bakery. If a customer orders a cake in December but pays in January, the income is recorded in January—when the payment is received. Similarly, if the bakery buys ingredients in December but pays the supplier in February, the expense is recorded in February.

For freelancers, the same applies. A graphic designer who completes a project in March but gets paid in April will record the income in April.

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Who uses cash basis accounting

Cash basis accounting is ideal for:

  • Small businesses and startups with simple transactions

  • Freelancers and consultants who receive direct payments

  • Service providers without credit sales or high inventory

This method is not suitable for large corporations, businesses with high inventory turnover, or companies required to follow statutory reporting norms.

Benefits of Cash Basis Accounting

  1. Simple and easy to implement – Cash basis accounting does not require advanced accounting knowledge, making it ideal for small businesses and self-employed individuals.

  2. Better cash flow management – Since transactions are recorded only when cash is received or paid, businesses can easily track available funds and manage spending accordingly.

  3. Lower compliance costs – With fewer accounting complexities, businesses using this method can save on bookkeeping and tax preparation expenses.

  4. Tax advantages – Income is only taxed when received, which can help businesses defer tax liabilities if payments are delayed.

  5. Less paperwork – Unlike accrual accounting, which involves tracking receivables and payables, cash basis accounting requires minimal record-keeping.

  6. Ideal for freelancers and small businesses – Individuals and small enterprises with direct cash transactions can efficiently manage their accounts using this method.

  7. Reduces errors – Since transactions are recorded based on actual cash flow, there is less risk of misreporting due to unpaid invoices or outstanding liabilities.

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Disadvantages of cash basis accounting

  1. Does not reflect financial health accurately – Since income and expenses are recorded only when payments are made, the method may not show the true profitability of a business.

  2. Limited financial insights – Businesses cannot track accounts receivable or accounts payable, making it challenging to assess outstanding obligations and future revenue.

  3. Not suitable for large businesses – Companies dealing with high transaction volumes, inventory, or credit sales need accrual accounting for accurate financial reporting.

  4. May not comply with tax regulations – Businesses exceeding a certain turnover limit in India may be required to use accrual accounting as per tax laws.

  5. Difficult to track long-term financial performance – Since cash basis accounting does not record income when earned or expenses when incurred, it may not provide a comprehensive view of business growth.

  6. Challenges in securing loans and investments – Financial institutions and investors prefer accrual accounting records for assessing a company’s stability, making it harder for cash basis users to obtain funding.

  7. Tax complications in certain cases – Businesses may face issues with tax deductions and liabilities if income and expenses do not align within the same financial year.

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Conclusion

Cash basis accounting is best for small businesses, freelancers, and professionals who want a simple, low-cost way to manage finances. It is easy to adopt, tax-friendly, and ideal for straightforward transactions. However, it does have limitations when it comes to long-term planning or scaling.

On the personal front, you can avoid such limitations by investing in a Bajaj Finance Fixed Deposit. With flexible tenures (12–60 months) and returns up to 7.30% p.a., it is a safe and rewarding way to grow your savings alongside your business income. Book FD.

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Frequently asked questions

How do you record cash basis accounting?
In cash basis accounting, transactions are recorded only when cash is received or paid. Income is recorded when customers make payments, and expenses are logged when bills are paid. Businesses track transactions through receipts, invoices, and bank statements. This method simplifies bookkeeping but does not account for outstanding receivables or payables.

What is cash accounting with an example?
Cash accounting records income and expenses only when money is received or paid. For example, if a freelancer completes a project in March but gets paid in April, the income is recorded in April. Similarly, if rent is due in December but paid in January, the expense is recorded in January.

Why should I consider FDs if I use cash basis accounting?

Because both focus on simplicity and certainty. While cash basis simplifies finances, FDs give guaranteed returns without the risks of market-linked products. Explore FD options offered by Bajaj Finance and invest now!

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As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or referhttps://www.bajajfinserv.in/fixed-deposit-archivesThe company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

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