It is method of recording accounting transactions only when expenses is actually paid and revenue amount is actually received. It is an opposite of accrual basis of accounting in which we record expenses and revenues when the transactions occurs no matter cash or cash equivalent is received or not.This basis of recording transaction is also called cash system of accounting.
Cash basis accounting is normally seen in small size entities where the owner or his assitant reocords the transaction when the customer or vendor recieves or collects amount. If the transactions are being done via bank account, they record the transaction over the basis of check issued or received.
There are so many disadvantages of using cash basis as your financial records will not be comparable from one accounting period to the other as most of the times, businesses pay two or more month’s bills at once. Over cash basis,the whole of the amount gets recorded in single month.