Cash basis
In one sentenceA method that records revenue when cash is received and expenses when they are actually paid, without regard to the period the transaction belongs to.
Simply put
The cash basis is simple: whatever comes into the cash box or bank is revenue, and whatever goes out is an expense. So it is closer to following a bank statement than to measuring profit.
Its drawback is that it distorts the period's profit: a large advance payment makes one month a loss and the following months profitable. It is useful for managing cash, but statutory financial statements are prepared on the accrual basis.
Worked example
A restaurant paid a full year's rent of 120,000 SAR in January.
Rent paid in January120,000 SAR
January's share on the accrual basis120,000 ÷ 12 = 10,000 SAR
January rent expense on the cash basis120,000 SAR
Formula: Period expense = Cash paid during the period
Don't confuse it with
Accrual basisIt spreads the rent over the months it belongs to, so January's expense is only 10,000 SAR.