cash method of accounting

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Cash method of accounting is a method of accounting used by many individuals and some small businesses to record their liabilities and income. When using the cash method, transactions are recorded only when the payments have been made or received. This is to be contrasted with the accrual method of accounting which records transactions as soon as a debt or income has been achieved, meaning the payment may not have been made yet. The cash method is easier to use because recording only has to be made when the actual financial payments are made. However, the cash method does not reflect obligations yet to be paid, and therefore, the cash method can be misleading regarding the state of the business. The Internal Revenue Service (IRS) requires most large businesses and some individuals to use the accrual method because of these flaws. 

[Last updated in November of 2021 by the Wex Definitions Team]