The two main accounting approaches are accrual accounting and cash basis accounting. Cash basis accounting is often employed by small organizations, but accrual accounting is frequently the preferred technique for larger enterprises. Cash basis accounting is a simpler way to manage your company’s finances because revenue and costs are recorded when cash is received or paid.
As was already noted, cash basis accounting is an accounting technique that keeps track of transactions when money is exchanged. For instance, if you were to buy a piece of equipment for your company, you would record the transaction as soon as the money was exchanged and not when the item was actually delivered. Similar to this, you record a transaction when cash is received from a customer rather than when the service was rendered if they pay you for a service.
The recording of cash basis accounting is rather simple. When money is exchanged, transactions are simply recorded. Let’s imagine, for illustration, that your company is paid $100 for a service it rendered. The following is how you would record the transaction: On the other hand, if you spend $500 on equipment, you would record the transaction as follows:
Debit: Cash $100
Credit: Revenue $100
Credit: $500 Cash
Debit: $500 Equipment
Are You Capable of Preparing Financial Statements on a Cash Basis? A cash basis can be used to create financial statements. In fact, it’s the only way to create a balance sheet, income statement, and statement of cash flows for companies that utilize cash basis accounting. Cash, accounts receivable, accounts payable, and any other assets or liabilities that involve cash are all included in the balance sheet for a cash basis accounting system. What Account Types Are Used in Cash Basis Accounting?
Only when cash is exchanged do transactions get recorded in cash basis accounting. Cash, accounts receivable, accounts payable, and any other accounts that involve cash are therefore included in cash basis accounting. For instance, you would only record the installment payments as they are made, not when the loan was taken out, if you had a loan that you were paying back in installments.
In summary, cash basis accounting is a straightforward accounting technique that is perfect for small enterprises. This strategy makes it simpler to maintain track of your company’s finances because transactions are documented as money is exchanged. Cash, accounts receivable, accounts payable, and any other assets or liabilities that involve cash are all included in the balance sheet for a cash basis accounting system. You may make sure that your financial statements accurately reflect the financial health of your company by adhering to the straightforward procedures for recording cash basis accounting transactions.