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Cash-basis accounting

Cash-basis accounting is a method of keeping the books that defines events based on cash flows and cash position.

Expanded Definition

Cash-basis accounting utilizes the bookkeeping method of noting income and expenses based on actual cash in-flows and out-flows during the fiscal year of the entity.

For example, individuals in the U.S. generally use the cash-basis method for accounting for their income/expenses during the calendar year of Jan. 1 to Dec. 31 of any given year. If the income was in the taxpayer's possession during that year (not counting any sleight of hand maneuvers), it counts as income. If the expense was paid (or in the case of credit-card purchases, the obligation to pay was incurred) during the calendar year, it can be used as an expense deduction.

For businesses utilizing the cash-basis method -- versus the accrual method -- the same applies: If the income was received or expense paid during the fiscal year, it will be reported on that fiscal year's financial statements and tax return.

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accrual basis accounting

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