Using Accounts Receivable in Cash Basis Accounting

Revenues and costs are only recorded when actual cash is collected or spent when using the cash basis accounting technique. This implies that cash basis accounting does not use accounts receivable, which indicate sums owed by clients to a business. It is a simpler way of accounting than accrual basis accounting because only cash transactions are documented. Income Statement and Profit and Loss Comparison

Actually, the profit and loss statement and the income statement are the same thing. Both statements display a company’s earnings and costs for a given time period, typically a month, quarter, or year. These statements are used to assess a company’s profitability by calculating net income or net loss by deducting expenses from sales. Balance sheet or income statement?

Typically, the income statement is created prior to the balance sheet. This is because the balance sheet displays the financial situation of a corporation at a certain point in time, whereas the income statement displays revenues and expenses for a specific time period. The net income or net loss is likewise calculated from the income statement and is then shown in the equity part of the balance sheet. Statement of Cash Inflows and Outflows An income statement prepared on the cash basis of accounting is referred to as a cash income statement. This indicates that accounts payable and receivable are not used and that only cash transactions are documented. Since only cash transactions are documented, the cash income statement is easier to produce than an accrual basis income statement.

How to Determine a Cash or Accrual Income Statement? You can check the revenue and expense accounts to see if an income statement was created using accrual basis accounting or cash accounting. The income statement is generated using the cash basis accounting method if the revenue and expense accounts are based on genuine cash transactions. However, the income statement is generated using the accrual basis of accounting if the revenue and expense accounts reflect revenues collected and expenses incurred but not yet paid.

In conclusion, since only cash transactions are documented, accounts receivable are not employed in cash basis accounting. The income statement and profit and loss statement are interchangeable terms that are used to assess a company’s profitability. A cash income statement is created using the cash basis accounting method and is often created before the balance sheet. You can check the revenue and expense accounts to see if an income statement was created using accrual basis accounting or cash basis accounting.