Cash basis accounting

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Cash basis accounting

• Cash basis accounting is an accounting method
  that reports revenue and expenses as they are
  received or paid. In other words, the cash method
  shows how cash comes in and goes out of a
  business. Cash basis accounting uses single-entry
  bookkeeping. It covers only short-term
  transactions. Thus, accounts like accounts
  receivable, accounts payable, or long-term
  transactions do not apply here.

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Who uses cash basis accounting in
business?   Individuals and small businesses that
do practically all of their business in cash
mostly use this method of accounting. In other
words, this accounting method is ideal for
individuals or companies with large cash flow.
However, cash basis accounting is not permitted
by the Tax Reform Act of 1986 in C corporations,
tax shelters, some types of trusts, and
partnerships with C Corporation partners.
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Advantages of Cash Basis Accounting   This
method comes with some upsides, including   Its
ease of usage This method of accounting is
relatively simpler, straightforward, and easy to
maintain. A person without a sound knowledge of
accounting can use this method easily. It is so
easy to use that many small business owners do
not hire accountants when using this method. It
gives you an insight on the cash at hand Cash
accounting is only concerned with the physical
funds that come in and out of business. Hence you
can easily see how much funds you have at
hand. Tax advantage This method offers a
potential tax advantage for businesses. Since you
can only record transactions when physical cash
comes in or out, you can control the timing of
transactions. Therefore, you can accelerate some
expenses and slow down revenue, thus lowering
your tax liability.
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Despite the advantages of cash accounting, there
is also a downside. The downsides to it. They
include Inaccuracy It may fail to show the
actual state of your company. For example, you
might assume that your company is doing well
because there is a lot of cash at hand, while in
reality, there are some unsettled debts.
Likewise, it could appear that the business is
not doing great due to a lack of cash when many
people owe you. Due to the inaccuracies
in cash basis accounting, some businesses with
poor cash flow may not be fancied by potential
investors. Most businesses may choose an accurate
accrual accounting method since it's more
reliable.   Manipulation A company can change
its reported results by failing to cash received
checks or by modifying the due date for its
liabilities. Lower chances of obtaining loans
Some lenders may be reluctant to loan businesses
reporting on this method since it doesn't produce
reliable financial statements.
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An alternate method of recording transactions is
the Accrual method. The accrual accounting method
reports income (revenue) and expenses based on
credit, accounts receivables, and accounts
payable. This method doesn't report revenue or
expenses in relation to cash. Instead, it reports
revenue when earned and expenses when incurred.
Businesses with more than 25 million in gross
receipts over the last three years mainly require
Accrual accounting. A significant advantage of
this method of accounting is that you know the
actual state of your business, even on a
long-term basis. In addition, you can accurately
tell if your business is profitable, which is a
good indicator for potential investors. The
disadvantage of accrual accounting is that it is
complex and can be catastrophic if cash flow is
not properly monitored.
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Conclusion
Conclusively, Cash basis accounting is a type of
accounting method that notes revenues and
expenses when cash is received or paid out.
Although it is a simple method of accounting it
doesn't give a clear picture of the business's
financial situation.    
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