Cash basis accounting is an accounting method that requires transactions to be recorded only when a cash flow has occurred. For example, income is recorded when cash is received and expenses are recorded when cash is paid.

It is a very simple method of accounting but it produces financial statements with limited informational value since the financial statements exclude all economic activities that have occurred for which the related cash flows have not yet occurred. For example, if a good or service is purchased and is received but has not yet been paid for, this transaction does not appear in the financial statements until the cash outflow occurs.

The cash basis method of accounting is commonly applied by small private sector entities that may not have the capacities or the need to produce accrual basis financial statements. For example, the financial statements may be produced for a tax authority that requires the financial statements to be prepared on the cash basis and the tax authority may be the only user of the financial statements.

The cash basis method of accounting continues to be applied by many public sector entities for various reasons including:

• To meet the needs of users who are primarily focused on the annual budget also prepared on the cash basis
• Lack of understanding of the benefits of accrual basis accounting
• Lack of capacity (e.g financial or technical) to implement accrual basis accounting