cash basis accounting

Cash Accounting

Introduction

Cash accounting is a written method of recording financial transactions. This type of accounting is only concerned with the cash that is being spent and received. It ignores any money transfers that take place. Cash accounting does not take into consideration any revenues or expenses that are not directly related to the cash or any accounts receivable and payable.

Overview

Cash accounting is a type of accounting system used in businesses to record and track financial transactions. All income and expenses related to cash receipts and payments are recorded into a set of accounts known as the cash account. The cash account typically includes bank accounts, cash on hand, accounts receivable, and accounts payable. Unlike the accrual method, which recognizes income and expenses when they are incurred, cash accounting includes only those amounts that have been received and paid.

Advantages

The main advantage of cash accounting is its simplicity. This method is easy to use and understand, and provides an accurate picture of the cash flow in a business. It is also effective for small businesses and businesses with few customers. Cash accounting also helps businesses reduce their recordkeeping costs since it does not require the production of detailed financial reports.

Disadvantages

A disadvantage of cash accounting is that it does not provide a comprehensive view of the business’s overall financial health. Since cash accounting does not recognize income and expenses until they are received or paid, the picture it provides of the company’s finances can be incomplete or inaccurate. It also fails to recognize other non-cash transactions, such as depreciation expenses, taxes, and bad debt expenses.

Conclusion

Cash accounting is a method of recordkeeping that only focuses on cash transactions. It is simple and easy to use, and is most suitable for small businesses. However, it does not provide a comprehensive view of the company’s finances, due to its inability to recognize all non-cash transactions. It is best used in tandem with the accrual method to provide a more comprehensive financial picture.

Cash book accounting or practice has its roots in traditional bookkeeping and is still used in many small businesses. It is sometimes called the single entry system, as all the transactions are only recorded once.

In cash book accounting, all the transactions are recorded in cashbooks which show the cash inflows and outflows. Each cashbook will have separate columns for date, particulars, reference number, credit and debit amounts.

In every transaction, both parties involved must record the transaction. For example, if cash is withdrawn from the bank, both the bank deposit account and the cashbook need to be updated. Usually, the entries are made from the cashbook, but entries will usually be made in the bank deposit book too.

In cash book accounting, the balancing of the accounts is a two-step process. First, the total of the debit column should be checked with the total of the credit column, to make sure the amounts agree. Secondly, the difference between the debit and credit columns should also be checked. If they are different, the variance needs to be investigated.

Advantages of cashbook accounting include: it is simple to understand and easy to use; it is less time consuming to reconcile accounts; it is easier to identify any discrepancies; there is a more stringent control over the financial activities of the company; and it is also a cost-effective way of keeping financial records.

Disadvantages of cashbook accounting include: the accounting system is not integrated with the banking system; the tracking and analysis of data can become difficult over long time periods; it is difficult to prepare detailed management reports; and the accuracy of information is dependent on the accuracy of manual entries.

In conclusion, cashbook accounting or practice has its advantages and disadvantages. It may be suitable for small businesses, but larger companies may find it too manual and inefficient compared to computerized accounting systems.