- Learn Basic Accounting in Less than 1 Hour!
- Accounting Basics
- What are Accounting Principles
- Accounting Cycle
- Accrual Accounting Basis
- Cash Basis Accounting
- Matching Principle of Accounting
- Conservatism Principle of Accounting
- Cash Accounting
- What are Accounting Policies?
- Accounting Estimates
- Mark to Market Accounting
- Cash Accounting vs Accrual Accounting
- Operating Cycle
- Fiscal Year
- Fiscal Year vs Calendar Year | Top Differences | Examples |
- Financial Reporting
- Financial Statements
- Interim Financial Statements
- Consolidated Financial Statement
- Audited Financial Statements
- Accounting Scandals
- Quality of Earnings
- IFRS vs US GAAP
- IFRS vs Indian GAAP
- Accounting for Fair Value Hedges
- Debit vs Credit in Accounting
- Double Entry Accounting System
- Journal in Accounting
- Ledger in Accounting
- Journal vs Ledger
- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Balance Sheet
- Balance Sheet
- Accounting Equation
- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
- Balance Sheet vs Consolidated Balance Sheet
- Bank vs Company Balance Sheet
- Commitments and Contingencies
- Management Discussion & Analysis
- Revenue Reserve vs Capital Reserve | Top 7 Differences
- Revenue Reserve
- Capital Reserve
- Capital Receipts vs Revenue Receipts | Top 8 Differences
- Capital Lease vs Operating Lease | Top Differences You Must Know!
- Debt vs Equity Financing | Advantages | Disadvantages | Example
- Internal vs External Financing | Top 7 Differences (Infographics)
- Available for Sale for securities
- Held to Maturity to securities
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Current Assets
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- LIFO Reserve
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Accounts Receivables Factoring
- Allowance for Doubtful Accounts
- Accrued Revenue
- Liquid Assets
- Quick Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Trading Securities in Balance Sheet
- Prepaid Expenses
- Tangible vs Intangible Assets
- Net Tangible Assets | Calculate Net Tangible Assets Per Share
- Tangible Assets
- Capital Expenditure (Capex)
- Salvage Value
- Residual Value
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Negative Goodwill
- Accounts Payable | Days Payable Outstanding | Formula |
- Current Liabilities | List of Current Liabilities on Balance Sheet
- Accrued Liabilities
- Notes Payable
- Revolving Credit Facilities
- Bonds Payable Accounting
- Bad Debt Reserve Allowance
- Deferred Expenses
- Unearned Revenue (Sales)
- Deferred Revenue (Income)
- Current Portion of Long-Term Debt (CPLTD) | Balance Sheet
- Long-Term Debt in Balance Sheet
- Financial Liabilities | Definition, Types, Ratios, Examples
- Long-Term Liabilities
- Accounts Receivable vs Accounts Payable
- Minority Interest
- Accounting for Convertibles
- Accounting for Derivatives
- Financial Lease vs Operating Lease
- Off balance Sheet Financing
- Finance vs Lease
- Shareholders Equity
- Shareholders Equity Statement
- Negative Shareholders Equity
- Par Value of Stock
- Share Capital
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Owners Equity
- Preferred Shares
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Stock Dividend
- Cash Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Cost of Goods Sold
- Direct Costs
- Indirect Costs
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Amortization of Intangible Assets
- Unrealized Gains (Losses)
- Non Cash Expense
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Double Taxation
- Net Loss
- Net Operating Loss (NOL)
- Tax Shield
- Sundry Expenses
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Cost vs Expense
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed cost vs Variable cost
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Cash Flow Statement
- Cash flow from Operations | Formula, Calculations & Examples
- Cash Flow from Investing Activities (Formula & Top Examples)
- Cash Flow From Financing Activities | Formula & Calculations
- Cash Flow Analysis
- Fund Flow Statement
- Direct vs Indirect Cash Flow Methods
- Cash flow vs Net Income | Key Differences & Top Examples
- Cash Flow vs Fund Flow | Top 8 Differences (with Infographics)
- Accounting Careers
- Accounting Interview Questions
- Financial Accounting Careers
- Top Accounting Firms
- Big Four Accounting Firms
- Forensic Accounting
- Cost Accounting
- Financial Accounting
- Accounting vs Engineering
- Finance vs Accounting
- Bookkeeping vs Accounting
- Accounting vs Auditing
- Bookkeepers vs Accountants
- Accounting vs Financial Management
- Cost Accounting vs Financial Accounting
- Cost Accounting vs Management Accounting
- Financial Accounting vs Management Accounting
- Public vs Private Accounting
- Accounting vs CPA
- Controller vs Comptroller
- Accounting Firms in Australia
- Accounting Firms in Canada
- Top Accounting Firms in US
- Accounting Books
What is Cash Accounting?
Cash accounting is a type of accounting which focuses on cash inflow and cash outflow. And at the end of the day, cash accounting helps us find out how much net cash a business has earned during a particular period of time.
Cash basis of accounting would consider cash received as revenue and cash expended (paid) as expenses.
Even if this method is not recognized under Companies Act, many companies maintain cash basis of accounting; because it’s easy to understand and easy to maintain.
Cash basis of accounting is so easy to maintain because one can simply track the expenses and the revenue quickly just by looking at the cash balance.
Another characteristic of cash basis accounting is that the business doesn’t need to show forth the taxes. Since everything happens in cash, there is no proof of earning and as a result, the company doesn’t need to pay any taxes until the cash is put into the bank. This also enhances the chances of discrepancies.
Example of Cash Accounting
Let’s look at an example of cash accounting.
Let’s say that Company ABC has sold finished products of $200,000 in cash. According to cash accounting, this entry will come under cash revenue since the business is selling its finished products in cash.
But what if Company ABC would sell its finished products of $100,000 in cash and another $100,000 in credit! According to cash basis accounting, only $100,000 would be recorded as cash revenue and not another $100,000 which was sold on credit. If we look at the accrual basis of accounting, $200,000 would be recorded as the revenue of the company.
Let’s look at another example.
Let’s say that Company MNC has large machinery which has been used for few years now. Every year, the company assumes depreciation of $4000 on this machinery as wear and tear so that after few years of use this machinery can be replaced by a new one.
According to cash basis accounting, this depreciation wouldn’t be counted as expenses and wouldn’t be recorded because there’s no cash involved in the depreciation expenses and it’s totally non-cash expenses.
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Advantages of Cash Accounting
As you can understand cash accounting has few benefits and few demerits. Let’s first look at the benefits –
- Simple: As a business, you have to choose one of the accounting methods. If you choose cash accounting, it’s the simplest because you will only record transactions that are related to cash. Other transactions won’t be taken into consideration.
- Maintenance is easy: Maintaining an accrual system of accounting is tough. Compared to that maintenance of cash accounting is pretty easy. You will record revenue when cash is received from customers and you will record expenses when cash is paid to suppliers.
- Liquidity: Since cash accounting is all about only cash transactions, the potential investors who would like to invest in the business doesn’t need to go through any liquidity ratio. S/he can look at the accounting system, look at the cash inflow and cash outflow and then find out for herself/himself the net cash flow of the business.
- Single-entry accounting: Cash accounting is single entry accounting. That means the effect occurs only on one account. It makes things easier for the business and the business also doesn’t need to follow the matching concept.
Disadvantages of cash accounting
There are also few demerits of cash accounting. Here are they –
- Not very accurate: Since cash accounting only records cash transactions, cash accounting doesn’t include all the transactions. As a result, we can’t say that cash accounting is very accurate. Plus under cash accounting revenue or expenses is recorded when the company receives or pays cash, even in the different accounting period.
- Not recognized by Companies Act: Few businesses follow cash accounting, but it is not a recognized method under Companies Act. As a result, cash accounting isn’t practiced by big companies.
- Chances of discrepancies: Since cash accounting only records cash transactions, the business can be involved in unfair practices by hiding the revenue or inflating the expenses.
When is cash accounting sufficient?
A big company can’t follow cash basis accounting. But what sort of companies can follow cash accounting? In simple terms, when cash accounting would be sufficient? Here are few conditions which need to be fulfilled for cash accounting to be sufficient –
- When you have a very small business and the business is either sole-proprietorship or partnership.
- When you only need to record few financial transactions.
- When you have very few employees.
- As a company, you don’t need to record income statement, balance sheet or any other financial statements.
- As a company, you never do business with credit. Every transaction (most of it) is in cash.
- You also have very limited fixed capital.
Cash Accounting Video
This has been a guide to what is Cash Accounting, their examples, advantages, and disadvantages etc. You may also have a look at these accounting articles to enhance your knowledge