Accounting is a world in itself as it has its own rules, concepts, principles, etc. which govern the accounting work and one of these concepts is the basis of accounting. The basis of accounting is classified into three parts and one of them is the cash basis of accounting.
Cash basis of accounting is accounting based on cash and it does not record credit transactions. This basis is mostly used by a person who wants to track and maintain only cash. According to this, when cash is paid or received then that transaction is recorded on the accounting book. If a person wants to record credit transactions as well then, they can start accounting according to accrual basis of accounting or if one wants both the basis then one can use hybrid basis.
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What is the Cash Basis of Accounting?
Cash basis of accounting is a base for accounting work that tells when to record economic transactions in the accounting books and it is the second most commonly used accounting basis. According to this, the transaction is recorded in the books when cash is paid or received. If the transaction is on a credit basis, then it is not recorded in the books as it is based only on cash.
If the business is big or one wants to have a detailed view of the business then this basis is not suitable as it does not record the credit transactions but if one deals only in cash then this basis can be useful.
For example, if a transaction takes place on 17.07.2024 and payment takes place on 19-07-2024, then the transaction will be recorded in the book on 19-07-2024 and not on 17-07-2024, but if the payment took place on 17.07.2024, then the transaction would have been recorded in the book on 17.07.2024 itself. In simple words, a transaction is recorded on the day when the payment for that transaction is made or received.
Features of the Cash Basis of Accounting
Following are the features of cash basis of accounting:
1. Base:
It is a base for accounting work, just like the accrual basis of accounting, as it tells when the economic transactions are to be recorded in the accounting books and it is one of the three bases given under the basis of accounting. If one wants to start accounting work according to it, then one has to select it before starting accounting work.
2. Only Cash:
This basis of accounting records only cash transactions as its principle is based on cash. If there is a credit transaction, then that transaction is not recorded in the books until cash is paid or received for that transaction.
3. Easy:
This basis is easier than other bases as it requires recording the transaction only when cash is received or paid. Credit transactions do not need to be tracked and one can easily understand and use it, but it can be problematic while preparing financial statements as it does not reveal the true financial position, performance, etc. but exceptions may apply.
4. Less Recognized:
It is less recognized than the accrual basis of accounting because it only records cash transactions and does not follow the proper double-entry system. This basis is not recommended for businesses that have credit transactions or for large businesses, but there can be exceptions.
5. Economical:
This method is economical to carry out accounting work as it does not require maintaining many books, all the work is done through the cash book only and there is also no need to hire any professional as anyone can understand and do it easily.
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QNA/FAQ
Q1. What is the cash basis of accounting?
Ans: Cash basis of accounting is a base for accounting work that tells when to record economic transactions in the accounting books.
Q2. Is cash basis accounting easy?
Ans: Yes, cash basis accounting is easier than other basis.
Q3. Is it true that the cash basis of accounting is to record only cash transactions?
Ans: Yes, it is true that the cash basis of accounting records only cash transactions.
Q4. Is cash basis of accounting a base?
Ans: Yes, cash basis of accounting is a base.
Q5. Write the features of the cash basis of accounting.
Ans: Following are the features of cash basis of accounting:
1. It is a basis for accounting work.
2. It tells when to record the transactions in the books.
3. It records only cash transactions.
4. It does not follow the proper double-entry system.
5. It is the second most commonly used basis for accounting.
6. It does not record credit transactions.
7. It is easier than other basis.
8. It is more economical than other basis.
9. It can be manipulated.
10. It is less recognized than accrual basis.
11. It mostly follows a single-entry system.
