Cash basis of accounting is doing exactly as the name refers \u2013 you account for transactions as the cash \u201cmoves\u201d (cash physically or through bank accounts). Note that when cash didn\u2019t \u201cmove\u201d (i.e. you didn\u2019t pay your bills or you did not receive money from clients) you don\u2019t account for the named transactions either. It\u2019s just left there \u201changing\u201d sort of say, somewhere on papers or in your memory. They are your unpaid bills and invoices.\u00a0<\/p>\n
One of the downsides with keeping your accounting cash basis is the fact that you\u2019ll never know your real expenses or revenue for the period. You may have a significant payable balance to one of your suppliers, but since you haven\u2019t paid for it, it\u2019s not in your expenses. This happens so regardless of the fact it relates to current period. You will account for it as the payment occurs and not sooner. Into which period the transaction relates to do not matter the slightest. If you paid in June for May\u2019s rent, its June the expense is accounted into.<\/p>\n
When you\u2019d argue that why even have such an accounting method, keep in mind that there are businesses and sole traders who don\u2019t exactly need accrual basis of accounting. Why? Main reason being that reporting requirements for them are extremely low, they are sole owners and they\u2019re probably trading in such business where it\u2019s acceptable to use this method. Cash basis of accounting is simple because it always \u201cfollows the trail of cash\u201d. Having to account for transactions only if money was moved means that you\u2019re never wrong in your timing and amounts when it comes to accounting entries. You paid off a 100 from a 1,000 debt means you\u2019ll account for an expense for this 100 and not the full 1,000. The remaining 900 are still kept as your payable, but it\u2019s not in your accounts.<\/p>\n
When doing business what you\u2019re aiming at the most is also being of course profitable, but also being liquid, i.e. having reasonable amount of cash. One statement where we use cash movement based information is the statement of cash flows. Note however that this statement can be prepared based accrual based information with slight adjustments done to the figures.<\/p>\n","protected":false},"excerpt":{"rendered":"
Cash basis of accounting is doing exactly as the name refers \u2013 you account for transactions as the cash \u201cmoves\u201d (cash physically or through bank accounts). Note that when cash didn\u2019t \u201cmove\u201d (i.e. you didn\u2019t pay your bills or you did not receive money from clients) you don\u2019t account for the named transactions either. It\u2019s […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[26,74],"tags":[],"class_list":["post-4016","post","type-post","status-publish","format-standard","hentry","category-2-processes","category-2-7-accounting-in-itself"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4016","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=4016"}],"version-history":[{"count":1,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4016\/revisions"}],"predecessor-version":[{"id":4017,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/4016\/revisions\/4017"}],"wp:attachment":[{"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=4016"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=4016"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=4016"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}