What is Cash basis of accounting

Cash basis of accounting is referred to as that method of accounting where the accounting system recognises revenues and expenses only when there is inflow and outflow of cash.

In other words, the cash basis of accounting recognises the expenses incurred and revenues earned immediately when money changes hands between two parties involved in the transaction.

In the cash basis of the accounting system, there is no consideration for income which is obtained from the credit accounts.

Applications of Cash Basis of Accounting

Cash basis of accounting is mostly used by micro and small businesses which deal exclusively in cash, this is used as it is simpler to maintain cash transactions.

Following are some of the businesses that apply the cash basis of accounting

1. Businesses that do not sell on credit

2. Sole proprietorship or partnership business that do not have a requirement of publishing financial statements for audit.

3. Business which has very less number of employees.

4. The business which does not maintain any inventory

Advantages of Cash Basis of Accounting

Here are some of the advantages of cash basis of accounting:

1. Cash only transactions are simpler to maintain.

2. The requirement of skills for managing cash transactions is less as compared to the more complex accrual basis of accounting.

3. Tax liability can be deferred using the cash basis of accounting.

4. It provides a clear view of the amount of cash possessed by the business.

Disadvantages of Cash Basis of Accounting

Here are some of the disadvantages of cash basis of accounting :

1. It provides a less accurate picture of the financial position of the business as compared to the accrual basis of accounting.

2. Business data can be manipulated by deferring payments or late deposit of cheques.

3. Financial statements cannot be audited under cash basis of accounting method

This was all about the topic of the Cash basis of accounting, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.