Cash Basis Accounting

Expanded Explanation: This method involves recording revenues when cash is received and expenses when they are paid. While simpler than accrual accounting, it might not accurately reflect the financial health of a business that engages in credit transactions.

Potential Issues: The simplicity can be misleading, as it may not show the true financial position if significant revenues or expenses are pending.

Example: Your home-based baking business records income when customers pay for their orders, not when they place them.