In cash-based accounting, expenses are recorded when they are paid, not when they are incurred.
- If you record the associated expenses when you pay your credit card bill, you are following the cash basis method ( when you pay the expense charged to the card you would reduce your cash balance)
- However, if you record the expenses when they are charged to the credit card and also record the credit card balance as a liability, you are mixing elements of accrual accounting with cash basis accounting
- This approach is not strictly cash basis because you are recognizing expenses before they are actually paid.
Here are some helpful links about cash basis accounting from the IRS and TurboTax:
- IRS Publication 538: This publication explains the rules for accounting periods and methods, including the cash basis method. You can find more details here.
- TurboTax Blog: This article discusses cash basis eligibility and how it can be beneficial for self-employed individuals, partnerships, and S corporations. Check it out here.
