When it comes to accounting, there are two fundamental methods for determining income: the tax basis method and the cash basis method. The difference between them is simple—the tax basis method looks at taxable income while cash basis looks at actual inflows and outflows of cash.
With the tax basis method, taxable income is reported in the period that it’s earned—even if it hasn’t been received yet. This means that money owed to you does not count until it is actually received. With the cash basis, income is only accounted for when it has actually been received, so the money owed to you counts as soon as it’s invoiced.
In summary, the tax basis method focuses on taxable income for reporting purposes, while the cash basis method looks at actual inflows and outflows of cash. Each approach has its own benefits and drawbacks which should be carefully weighed by business owners before deciding which one works best for their individual circumstances.