Cash Basis of Accounting Definition, Example and Importance

cash basis of accounting definition

Cash basis of Accounting Definition

Cash basis of accounting Definition – “The recording of revenue and expenses when cash actually changes hands. This approach is seldom used except by very small companies.

This is one of the basis of recording the transactions in accounting. According to this approach, only those transactions are recorded which involves the cash. This could be the cash received from customers or the payment made by the company in the form of cash.

In this method, the transaction is recorded in the books of account only when cash is realized. No transaction is recorded if the purchase or selling is made on credit basis. Such transactions are recorded when cash is actually received.

This type of accounting method is suitable in small entities only. In addition to this, this type of accounting is not acceptable under the generally accepted accounting principles or international accounting standards. The cash basis of accounting is suitable in the following cases –

  • For accounting in smaller enterprise or entities.
  • In organisation where there is no audit.
  • Business that are involve in service busines and do not require to hold any inventory.

Example of Cash basis Accounting

Ram sells goods of Rs. 20,000 on credit to Shyam on 31 June 2017. However, he received cash on July 30 2017. As per Cash basis method of accounting, this transaction will be recorded in the books of account on 30 July, when the cash is received.

Importance of Cash basis Accounting

This basis of accounting is one of the most simplest of all. Along with this, it is very easy to understand. So for using cash basis of accounting no accounting professionals are required. As this method records only cash transaction, it is sort of a cash flow statement. So, provides a clear picture of cash inflows and cash outflows of the business. The best part is, this method is based on single entry accounting system so there are very less accounting complications.

Related Financial Terms of Cash- based Accounting

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