The basis of accounting determines when a business records income and expenses.
There are two main methods: accrual accounting and cash accounting.
Under the accrual method, income is recorded when earned and expenses when incurred, regardless of when cash is exchanged.
In contrast, the cash method records income only when payment is received and expenses only when they are paid.
The time lag between earning income and receiving cash, or incurring an expense and paying for it, can significantly impact financial reporting and tax obligations.
Choosing the right basis of accounting affects how a business tracks performance, meets compliance requirements, and files taxes accurately.