Question

What are the advantages and disadvantages of cash basis of accounting?

Answer 1

The advantages of cash basis of accounting are:

(i) It is very simple because no adjustments are required for advance and outstanding incomes and expenses.

(ii) It is an objective approach.

(iii) This approach suits the organisations which mostly have cash transactions.

The disadvantages of cash basis of accounting are:

(i) It does not provide a true and fair view of the financial position of the enterprise because it does not record advance and outstanding incomes and gains.

(ii) It ignores the matching principle, accrual concept and revenue recognition principles of accounting.

(iii) This system does not differentiate between capital and revenue items.