Basis Accounting Definition

Short Definition:
There are two primary methods of recording income and expenses: Cash basis and Accrual basis. Every business needs to select one method and use it through the life of the business. It is possible to change the basis, but in most situations approval from the Internal Revenue Service (IRS) is required.

Expanded Definition:
Businesses need to record transactions using one of two primary methods: Cash basis or Accrual basis. Using Cash basis, income is reported when it is actually received and expenses are recorded when they are actually paid. Accrual basis requires income to be reported as soon as it is earned and expenses need to be recorded as they are incurred. Businesses with inventories need to use the Accrual basis of accounting or a Hybrid basis, which is a combination of the two primary methods.

Related Blog Article:
What is Cash Basis?
What is Accrual Basis?