With What Method of Accounting Is Revenue Recorded Only When Cash Is Received?

by Hunkar Ozyasar

Accountants have a great deal of discretion when recording revenues and expenditures. The most conservative approach is to enter a sale into the books only when the buyer pays cash. While suited for certain firms and circumstances, however, this method does not always result in the most accurate balance sheet. Understanding the limitations of the two major revenue recognition methods, as well as their pros and cons, is therefore crucial for any business owner or investor.

Cash Method

The accounting method where revenue is only recognized when the firm receives cash is known as the cash basis accounting, often referred to as simply cash accounting. Here, the firm will not record a sale in the books until it receives cash, a check or the money is electronically transferred to its bank account. When using the cash method, expenses too, are only recorded when you make a cash payment, send a check or electronically transfer the funds. In some instances, this accounting treatment can result in a substantial gap between the time the goods are delivered and a sale is actually recorded. Especially if a buyer delays payments, the firm may only be able to record a sale several months or even years after physical delivery.

Accrual Method

The other alternative is to record a sale as soon as a sale is made, which is known as the accrual method. This brings up the question of what defines a sale. Is receiving a deposit enough to record a sale or is merely signing a legally binding agreement sufficient? A more conservative approach to the accrual method is to recognize a sale only when the goods are physically delivered. Depending on the circumstances, as well as the boundaries set by the accounting code, any of these events can mark a sale. When using the accrual method, the firm will also recognize expenses as it uses up resources. The accounting department will get a record of the water used and record a utility expense without waiting for the water bill to arrive or payment to the utility company to occur.


When using the cash method, the firm's balance sheet is more representative of the actual resources at hand. Since a sale will only be recorded when it brings in cash and an expense must first deplete the cash reserves before it goes into the books, more sales mean more cash at hand under this treatment. The accrual basis, on the other hand, gives a better idea of things to come. Since all expenses must eventually be paid off and most sales will at some point bring in cash, the accrual basis reflects the eventual financial impact of what has thus far been accomplished.


The cash basis tends to punish firms who work on long-term projects. Imagine that the firm is building a bridge, which is largely completed, and whose payment will certainly be collected from the local government. During the many months or even years when the construction is occurring and bills are paid in cash and recorded, the books may show no revenue at all. The downside of using the accrual basis is that revenues that may never be collected are sometimes recorded in the books. Until the cash actually comes in, there is always a slim chance that the anticipated income may not materialize. However, accountants can partially mitigate this problem by trying to anticipate defaults and adjusting the books accordingly.

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