Which type of accounting recognizes expenses when cash is paid?

Cash Basis Accounting is the method that recognizes expenses only when cash is actually paid out. This approach aligns with the practice of recording financial transactions based solely on cash flow, meaning that expenses are acknowledged at the moment of payment rather than when they are incurred. This method is straightforward and particularly useful for small businesses and individuals who may not have complex financial transactions.

For example, if a business pays for supplies in January, it records that expense in January, regardless of when the supplies were used or the invoice was received. This can simplify accounting for entities with limited resources or operations focused on immediate cash transactions.

Other methods, such as Accrual Basis Accounting, record expenses when they are incurred regardless of cash flow, and Modified Accrual Accounting typically applies to government entities, recognizing revenues when they are available and measurable. Deferred Accounting involves deferring the recognition of revenues or expenses to future periods, which contrasts with the principles of the cash basis method.