What does the cash method of accounting report?

The cash method of accounting is a widely used accounting practice, particularly by small businesses, that recognizes income and expenses primarily based on actual cash transactions. Under this method, income is reported when it is constructively received, meaning it is available for use by the taxpayer, regardless of when the economic activity that generated the income occurred. Similarly, expenses are reported when they are paid, not necessarily when they are incurred.

This approach contrasts with the accrual method of accounting, which reports income when it is earned and expenses when they are incurred, regardless of cash transactions. The cash method provides a clearer picture of the cash flow within a business, as it ties revenue and expenses directly to cash movements. For businesses that have relatively uncomplicated transactions and wish to maintain simplicity in accounting, the cash method can be particularly advantageous.