Part Four
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CASH ACCOUNTING
Often small start-up businesses do their accounting on a cash basis. A sale is recorded when the cash comes in. Costs are recorded as they are paid. In a cash-based business, increases or decreases in cash are the same as profit or loss. Not surprisingly, this approach is known as cash or cash-based accounting.
Cash-based accounting is a good, simple method when a business is in its infancy, or so long as it stays very small. As a business grows, however, cash-based accounting does not do a good job of matching revenue with costs (remember the matching principle). So nearly every growing business eventually adopts accrual accounting; it gives a more accurate picture of profits for a given period of time. You ...
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