Recording income when money arrives and expenses when money leaves.
Cash-basis accounting records income when cash is received and expenses when cash is paid — nothing more. No receivables, no payables, no accruals: if money didn't move, nothing happened.
Its virtue is simplicity, and for many very small service businesses it's entirely adequate (and a common basis for filing taxes — confirm with a tax professional for your situation). Its weakness is distortion: a great month of collections can hide a terrible month of sales, and money owed to you — or by you — is invisible on the books.
In January you pay a full year's $1,200 insurance premium. Cash basis shows a $1,200 January expense and zero insurance expense for the next eleven months. Accrual books would spread it $100 per month — a truer picture of monthly cost.
Accrual Accounting · Prepaid Expenses · Profit & Loss Statement (Income Statement) — or browse the full plain-English glossary.
Reading a definition is the easy part — the Daily Challenge (ten questions a day, free, no signup) is how terms like this become reflexes. Going for certification? Start with the free ProAdvisor readiness check.