cash basis accounting


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Related to cash basis accounting: Accrual basis accounting

Cash Basis Accounting

A system of accounting that recognizes revenue in the order in which it is received, and expenses on the same basis. Cash basis accounting does not deal with accounts receivable or accounts payable and only recognizes transactions actually paid for. This accounting system is easiest and perhaps best for organizations with few or no credit sales. See also: Accrual Accounting Convention.

cash basis accounting

A method of accounting in which the receipt and payment of cash are the basis for recording transactions. Thus it is not the date on which goods and services are received that matters, as in accrual accounting, but the dates on which the cash changes hands for the transactions. Cash basis accounting is typically used for tax purposes by individuals but not by corporations. Compare accrual accounting.

Cash basis accounting.

Cash basis accounting is one of two ways of recording revenues and expenses. Using this method, a company records income on its books when it receives a payment and expenses when it makes a payment.

In accrual accounting, by comparison, a company counts revenue as it's earned and expenses as they're incurred.

For example, when a magazine company sells annual subscriptions, it receives the cash for the subscriptions at the beginning of the year, but it doesn't earn the whole amount of the subscription cost until it has sent the subscriber a full year's issues of the magazine.

In cash basis accounting, paid subscriptions are recorded as revenue when the company receives the payments. In accrual accounting, the company records revenue only as the subscription is fulfilled.

A $24 subscription for 12 monthly issues of a magazine would result in immediate revenue of $24 in cash basis accounting, versus an accrual of $2 of revenue each month under accrual accounting.

References in periodicals archive ?
In contrast, cash basis accounting has caused distortions in government revenues because it does not enable a full view of volume for the year.
Herbest (2010) also used a questionnaire to determine whether municipal government managers use accounting information for decision-making and whether there is a preference for information generated by accrual or cash basis accounting. He conducted interviews with 41 public municipal administrators in Espirito Santo State, including 11 mayors and 30 secretaries of 11 municipalities.
In contrast, the use of cash basis accounting procedures alone distorts the cost of government operations.
In general, the group of respondents as a whole (Table 3) and the user and preparer groups (Tables 4, 5 and 6) thought that information based on accrual basis accounting was more useful than information based on the cash basis accounting for nine out of the 10 scenarios presented.
(2010) study, in our simultaneous comparison of the perceptions of the three groups of respondents regarding the usefulness of information for decision-making (Tables 4, 5, and 6), we observed that the preparers group (Table 6) attributed a lower mean value to cash basis accounting for all evaluated scenarios, indicating that preparers perceive this type of accounting system as having a lower capacity for generating information useful for decision-making than internal and external information users.
Internal and external users' greater familiarity with cash basis accounting is consistent with the findings of Herbest (2010).
"There's nothing wrong with using cash basis accounting so long as it reasonably and accurately represents the true financial accounting and position of the organization," said Andrew Lang, national director of nonprofit services for BDO Seidman, an accounting and management firm based in Chicago.
While the module reviewed here will only handle cash basis accounting, integrating additional modules for Accounts Receivable, Accounts Payable, and Payroll is easily done.