Cash basis bookkeeping

Cash basis bookkeeping covers income recorded when it is received, whether by bank deposit, card processor payout or check, and expenses recorded when they are actually paid out of the business. Every bank and card account is reconciled to its statement each month, and a cash-basis profit and loss statement and balance sheet are delivered at close.

Sales tax collected on behalf of a state, deposits held for a customer, and loan proceeds are each tracked separately from operating revenue and expense, so the top line reflects what the business actually earned rather than money that is passing through. Any open items, an unmatched deposit, a payment to an unfamiliar vendor, are logged for you to answer before the period closes.

Cash basis fits a sole proprietor, a small service business, a consultant billing a handful of clients, or an early-stage company with simple operations and no significant inventory. It also fits a business that primarily wants to know its bank balance and does not yet answer to a lender covenant, an investor reporting requirement, or a tax rule that forces accrual.

It generally does not fit a business carrying substantial inventory for resale, since cash basis alone can distort the timing of cost of goods sold, or a business that has already crossed the IRS gross-receipts threshold for mandatory accrual accounting. We flag both situations during onboarding rather than let a business build a year of books on the wrong basis.

Each month we pull bank, card and payment-processor activity, record income as it is received and expenses as they clear, and reconcile every account against its statement. Anything that cannot be coded cleanly from the records, such as a personal card charge on a business account or a deposit with no clear source, goes on the open-items list for a short answer from you.

Once open items clear, the period is reconciled and closed, and you receive a profit and loss statement and balance sheet on a cash basis. A senior reviewer reviews the file before it goes out, checking that nothing has been coded as an accrual item by mistake, such as a bill entered as an expense before it was actually paid.

The most frequent issue in a first review is a mix of cash and accrual entries in the same file, usually from bills entered into QuickBooks or Xero as unpaid before the software's bank feed later shows the actual payment, double-counting the expense. We also regularly find sales tax collected sitting inside gross revenue instead of its own liability account, and loan or investor funds recorded as income rather than a liability or equity contribution.

Another common problem is a business that has quietly crossed the point where cash basis no longer fits: growing inventory, or gross receipts approaching the IRS threshold for mandatory accrual. We flag that during the monthly close, with enough notice to plan a conversion rather than scramble at tax time.

Cash basis bookkeeping runs inside QuickBooks Online, Xero or Wave, whichever the business already uses. All three record cash-basis reports natively, and QuickBooks Online and Xero can toggle a report between cash and accrual view for comparison, though the underlying ledger for a true cash-basis engagement is kept clean of accrual-only entries such as unpaid bills sitting as expenses.

If a business is not yet set up in any of the three, we configure a file in the owner's name, so ownership of the software subscription and the data inside it stays with the business regardless of who does the monthly bookkeeping.

Cash basis bookkeeping is priced the same way as monthly bookkeeping generally: by transaction volume and account complexity, using the tiers on the published rate card at /us/pricing rather than a flat number quoted here. A simple, low-volume cash-basis file is typically the least expensive bookkeeping engagement to run, since there are no receivables or payables to maintain between periods.

If prior months are not reconciled when the engagement starts, that catch-up work is scoped and priced separately from the ongoing monthly fee, and your exact cost is confirmed in writing before work begins.

Under section 448(c) of the Internal Revenue Code, most C corporations and partnerships with a C corporation partner cannot use the cash method once their average annual gross receipts over the prior three tax years exceed a statutory threshold that is indexed for inflation each year; the base figure in the statute is $26 million. A related exception under section 471(c) lets qualifying small businesses at or under that same threshold treat inventory as non-incidental materials and supplies rather than forcing full accrual accounting for inventory.

Sole proprietorships, S corporations and most partnerships without a C corporation partner are not subject to this specific test and generally retain more flexibility to use cash basis regardless of size, subject to other IRS rules. We track where a growing business sits relative to this threshold as part of the annual planning conversation, not only when a tax return is due.