What is the Cash Method of Accounting?
The cash method of accounting records accounting transactions on a receipts and payments basis. The double entry bookkeeping system is still used, however no transaction is recorded unless cash has been physically paid or received by the business.
The cash method of accounting is simpler than the accruals method, but it has the disadvantage that it does not comply with the fundamental accounting concept of matching expenses to revenues.
For example, if a business pays for its electricity on a quarterly basis, using the accrual method, each month an estimate of the usage would be made and accrued into the accounts. However, using the cash method of accounting, only the month in which the quarterly bill was paid would include a charge for electricity. Using the cash basis, the monthly accounts would not show an accurate reflection of the electricity expense for each period.
While the cash method of accounting might be suitable for a small business to keep a simple record of transactions during the year, it is preferable to use the accruals method of accounting to produce meaningful management accounts.
For further information see the Wikipedia Cash Methods of Accounting definition.
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