Cash Accounting

Cash accounting is that method in which we record each transaction on the basis of cash. When we receive cash, transaction of receipt will be recorded and when we pay cash, transaction of payment will be recorded. It means there will be not any record of credit sale or purchase transaction. So, this accounting method is totally different from accrual accounting.

For example, we sold goods of $ 500 to Mohan in Jan. 2011 but we received cash from our customer Mohan in Feb. 2011. In cash basis accounting, we will record our sale in the month of Feb. 2011 instead of recording transaction in Jan. 2011. If there are cash expenses of  $ 600 Feb. 2011, our cash book show negative balance. If we deal through Bank, $ 100 will be bank draft.

Suppose, Our customer Sohan gives us $ 1000 advance for his buying in March 2011. In the month of march, if there are $ 600 cash expenses. We will have net cash balance under cash accounting $ 300 because we will show advance as our sale and previous bank draft will deduct as our cash expense and we will also deduct current month's cash expenses.

{ Important Note : Cash accounting or cash basis accounting is only useful there are almost cash transactions in our business but if there are lots of credit transaction, accrual accounting is best option because with accrual accounting, we know correct profit on the basis of actual transaction happens. All credit sale and purchase and other credit revenue and expenditures will be included in accrual accounting.} 

Related : Historical Cost Vs Fair Value


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Accounting Education: Cash Accounting
Cash Accounting
Accounting Education
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