Question

what is your understanding of cash accounting? Several small businesses use cash accounting and you may have at one time or another worked in such an organization? Corporate entities utilize an accrual accounting approach. How would you define this and why is it used as opposed to cash?

Answer 1

The cash accounting is the recording of the transactions on the cash receipt or cash payment basis. All the revenues and expenses are recorded at the time of cash received towards the sales and cash paid towards the expenses/purchases. No accounts receivables and accounts payables are recognized in accounting.

Usually, small businesses use to opt for the cash basis of accounting for its simplicity and lesser record maintenance. The bank reconciliation will play an important part because all the transactions involves the cash. Under the cash accounting method, it is beneficial to track any business transaction because all entries are in cash book only. Business is taxed only for the revenues/incomes whose cash has been received.

The GAAP requires the business entities to records the accounts on the Accrual basis because here the revenues and expenses are recorded when they are actually earned or expended. Here the revenues are matched with the expenses which are incurred on the generation of the revenues. Here, regardless whether the cash has been received or not, the revenues and expenses are recorded and carried forward to the period to which is pertains through balance sheet.

The opposed to Cash basis accounting is used, so that all the transactions are recorded and the period’s revenues are matched with the expenses incurred on their behalf.

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