Cash Basis Accounting
Cash basis accounting records revenue when money lands and expenses when money leaves. It's simple, it matches your bank account, and for a small service business it's often fine. For a business that buys inventory before selling it, it's misleading: profit becomes a function of when you paid suppliers rather than what you earned, and margins jump around with every purchase order.
The failure mode is easy to see with numbers. A seller doing a steady $120,000 a month places a $150,000 inventory order in September. Cash books: September shows a $60,000 loss, November shows a $70,000 profit, and neither number describes the business. An owner reading those statements might panic in September and overspend in November. The margin never actually moved.
One nuance worth knowing: your books and your tax return don't have to use the same method. Plenty of sellers keep accrual books for management and exit-readiness while their CPA files on a permitted method that defers some tax. What doesn't work is running the whole business on cash books and hoping to fix it later; the conversion gets more expensive every month. If you're already there, catch-up bookkeeping rebuilds the history, and our guide to what ecommerce bookkeeping costs covers what the switch involves.
Where this shows up in our work
This isn’t textbook material for us; it’s the day-to-day of keeping seller books right. See how we handle it in practice:
Catch-Up Bookkeeping→