cash basis accounting
Cash basis accounting means you record money only when it actually lands in your account or actually leaves it, not when the deal is agreed.
In plain English
"But oga, I sent the invoice last month, why does your book show no sales for that job?" "Because you haven't paid me yet, my brother. Once the money enters my account, that's when I write it down. Until then, on paper, nothing happened."
That exchange between two small business owners in Alaba market captures cash basis accounting perfectly. You do not record income when you send an invoice or sign a contract. You record it when the cash physically arrives. Same thing with expenses. You do not record a bill the day you receive it, you record it the day you actually pay it.
This is different from accrual accounting, where you record the sale the moment it happens, whether or not the cash has moved. Cash basis is simpler, more like keeping a diary of what actually touched your hands, rather than a diary of every promise made.
Say a tailor in Aba finishes a wedding gown in June and the bride promises to pay ₦80,000 in July. Under cash basis, the tailor's books show zero income in June, even though the work is fully done. In July, when the ₦80,000 hits her account, that is when it appears as income.
Many small businesses, freelancers, and sole traders in Nigeria and in the United Kingdom use cash basis accounting because it mirrors real life. It tells you plainly how much money you actually have, not how much you are owed or how much you owe. HMRC in the UK even allows many small businesses to file taxes this way precisely because it is easier to track.
The catch is that cash basis can paint a misleading consider of how a business is truly doing. You could look broke on paper in a month where you did loads of work but haven't been paid, and look flush in a month where old debts finally clear. Larger companies avoid it for that reason, and instead lean on accrual accounting for a fuller consider.
A UK based Nigerian graphic designer completes a ₦450,000 branding project for a client in London in March, but the client only transfers the money in April. Under cash basis accounting, her books record ₦0 income in March and ₦450,000 in April, exactly when the cash actually reaches her account.
Questions people ask
Is cash basis accounting allowed for all businesses?
No. Many countries limit it to small businesses, sole traders, and freelancers below a certain turnover. Larger or more complex companies are usually required to use accrual accounting instead, since it gives a truer consider of financial health over time.
Why would anyone prefer cash basis over accrual accounting?
It is far simpler to manage, especially without an accountant. You just track money in and money out, which suits small traders, freelancers, and anyone who wants their books to match what is actually sitting in their bank account.
Does cash basis accounting affect how I pay tax?
Yes, often significantly. Since income is only counted when received, you might delay tax on money you are owed but haven't collected yet. This can help cash flow, but it also means unpaid invoices from struggling clients still count as pure loss with no tax offset until you write them off properly.
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