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Simple English definitions for legal terms
cash method of accounting
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A quick definition of cash method of accounting:
The cash method of accounting is a way to keep track of money coming in and going out. With this method, you only record transactions when you actually pay or receive money. This is different from the accrual method, which records transactions as soon as you owe or earn money, even if you haven't paid or received it yet. The cash method is easier to use, but it doesn't show all the money you owe or are owed. That's why big businesses and some people have to use the accrual method instead.
A more thorough explanation:
The cash method of accounting is a way of keeping track of money that comes in and goes out of a business. It is commonly used by individuals and small businesses. With this method, transactions are only recorded when the actual payment is made or received. This is different from the accrual method, which records transactions as soon as a debt or income is earned, even if the payment has not been made yet.
For example, let's say a small business sells a product to a customer on credit. With the cash method, the sale would not be recorded until the customer actually pays for the product. On the other hand, with the accrual method, the sale would be recorded as soon as the product is delivered, even if the customer has not paid yet.
The cash method is simpler to use because it only requires recording transactions when money actually changes hands. However, it can be misleading because it does not reflect any obligations that have not yet been paid. This is why the Internal Revenue Service (IRS) requires most large businesses and some individuals to use the accrual method.