Cash basis accounting is one of two ways of recording revenues and expenses. Using this method, a company records income on its books when it receives a payment and expenses when it makes a payment.
In accrual accounting, by comparison, a company counts revenue as it's earned and expenses as they're incurred.
For example, when a magazine company sells annual subscriptions, it receives the cash for the subscriptions at the beginning of the year, but it doesn't earn the whole amount of the subscription cost until it has sent the subscriber a full year's issues of the magazine.
In cash basis accounting, paid subscriptions are recorded as revenue when the company receives the payments. In accrual accounting, the company records revenue only as the subscription is fulfilled.
A $24 subscription for 12 monthly issues of a magazine would result in immediate revenue of $24 in cash basis accounting, versus an accrual of $2 of revenue each month under accrual accounting.
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