What best describes ‘cash basis accounting’?

Cash basis accounting is characterized by the recognition of revenues and expenses only when cash is exchanged. This means that a company records income when it receives cash from customers and expenses when it pays cash to suppliers or vendors. This method contrasts with accrual basis accounting, where transactions are recorded when they are earned or incurred, regardless of when the cash is actually exchanged.

The simplicity of cash basis accounting makes it useful for small businesses and individuals who may not have complex financial transactions. It provides a clear picture of cash flow, as it reflects the cash that is actually available at any given time. However, because it does not take into account outstanding receivables or payables, it may not provide a complete view of a company’s financial condition.

The definition in the other choices either refers to aspects of accrual basis accounting or suggests nuances that are not core to cash basis accounting, such as the exclusive recording of cash transactions or the context of large corporate financial reporting, where accrual accounting is more commonly used due to regulatory requirements.