Cash basis accounting is a straightforward way of recording financial transactions and activities. It recognizes income and expenses only when cash is exchanged. This method of accounting does not require complicated adjusting entries that are necessary under accrual basis accounting. It simplifies record keeping and is suitable for smaller, less complex businesses such as sole proprietorships. Generally speaking, there are two main principles associated with this approach to bookkeeping – record income when it is received, and record expenses when they are paid. By doing so, the company’s financial statements accurately reflect its current financial position at any point in time.