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What is Cash accounting?

Cash accounting records income when cash arrives and expenses when cash leaves — simple and intuitive. Send an invoice in December, get paid in January: that's January income. Most sole proprietors and small businesses use it; it's allowed up to certain revenue thresholds.

In practice

A freelancer invoices $3,000 on December 30 and receives it January 8. Under cash accounting, the income belongs to the new tax year.

Related terms

  • Accrual accounting — Recording income when earned and expenses when incurred.
  • Ledger — The master chronological record of all business transactions.
  • Cash flow — The movement of money into and out of the business.

Simple books start with simple invoices

Numbered, professional invoices feed cleanly into cash-basis books.

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Frequently asked questions

Who can use cash accounting?

Most sole proprietors, freelancers, and small businesses under IRS revenue thresholds. Businesses with inventory generally can't.

What's the main downside?

It can mislead: a month looks great because big checks arrived, while the work was done months ago. Pair it with an AR aging report for the real picture.

Can cash accounting lower my taxes?

Timing-wise, yes — December invoices paid in January shift income a year. It's legitimate timing, not evasion, as long as the method is consistent.