Cash basis accounting is a straightforward way to track your company’s finances. It’s especially well-suited for businesses that only deal in cash transactions.
This article explains everything you need to know about cash basis accounting, including its pros and cons and who should use it.
Plus, we’ll give you tips for transitioning to this method of accounting. So if you’re looking for a reliable and uncomplicated way to keep tabs on your business finances, read on!
What is Cash Basis Accounting?
This accounting method records revenue and expenses when payments are received or paid out rather than when the transaction occurs.
This means cash transactions only – no accounts receivable or payable (so no invoice or credit card payments).
- Transactions are only recorded when cash is received or paid out
- Records revenue and expenses when payments are received or paid out
- Suitable for businesses that only deal in cash transactions
- The simplest form of accounting
How does Cash Basis Accounting work?
Cash basis accounting is pretty straightforward. This method records income and expenses only when cash changes hands.
If you receive payment for services or products in 2020 for services rendered in 2019, the revenue will not be included in your financial statements until 2020.
Similarly, if a business pays cash for an invoice due in 2018, the expense will be recorded in 2020.
The benefit of cash basis accounting is that it requires much less effort to track transactions than other bookkeeping forms.
This makes it an attractive option for businesses with few transactions or those that don’t have time to keep up with more complex accounting methods.
Expenses are recorded when paid out, and income is only counted once received.
The Advantages and Disadvantages of Cash Basis Accounting
Just like anything else, cash basis accounting has both pros and cons. Be sure to evaluate your needs before deciding whether or not to use them.
Advantages
- Simple to use: Cash basis accounting is the simplest form of bookkeeping. It is straightforward to understand for business owners who don’t have experience in accounting.
- Lower cost: Bookkeeping fees are typically lower for cash basis accounting because businesses don’t need as many transactions recorded on their books.
Disadvantages
- Not very accurate: Since cash basis accounting only records transactions when cash is exchanged, there may be discrepancies in the books. For example, if an invoice was paid in 2019 but not recorded until 2020, it could cause the financial statements to appear incorrect.
- No information about accounts receivable and payable: Since cash basis accounting does not record any accounts receivable or payable on the books, investors may not get a complete picture of the company’s financial health.
Who should use this method?
It is perfect for businesses that are just starting or have few transactions. It’s also a good option for businesses that only deal in cash transactions, such as retail stores.
However, it is essential to note that cash basis accounting may not be suitable for larger companies with more complex financial needs.
They may need to use accrual basis accounting to ensure accuracy and comply with regulations.
It’s also important to note that cash basis accounting is not eligible for certain tax credits. Business owners should consider their financial goals before choosing an accounting method.
If you’re a small business owner who only deals in cash transactions or someone just starting, cash basis accounting is the right choice for you.
It’s easy to use and helps you track cash flow more accurately. However, it is crucial to consider your business goals before committing to any accounting method.
Conclusion
Whether Cash Basis Accounting is the right choice depends on your business goals and needs.
Consider all the advantages and disadvantages before committing to any one accounting method. You can make the best decision for your business with the correct information.
Don’t let cash flow problems sabotage your business. Subscribe to our blog for tips on how to manage your finances.
