In cash accounting, expenses are only recorded when they are paid and income is only recorded when the revenue is received. Cash accounting is one of the more simple ways of keeping up with the books and is most commonly used by small businesses.
In cash accounting, accounting records will match the dates when cash hits or leaves the bank account. Cash accounting is often compared to accrual accounting, which records income and expenses as soon as they were incurred. Cash accounting is easy to maintain because you can quickly track expenses and revenue by looking at the cash balance.
What Type of Account is Cash Accounting?
Cash accounting is a basis of accounting, which is related to the time when transactions get recorded. You can use accounting software to record your cash accounting, or simply keep track of everything yourself. Cash accounting includes checks, virtual deposits, bank notes, and any form of payment or current assets, as long as it is reflected as a positive income in your statements. Cash accounting is one of two types of accounting, with the other type being accrual accounting.
What is an Example of Cash Accounting?
An example of cash accounting would be when a company is invoiced for services costing $5,000 dollars on July 18th but doesn’t pay for the services until August 18th. The date of August 18th would be what is recorded in the company’s books of services paid. Similarly, if a company is paid $10,000 on the date of August 18th, then the recorded date in the books of being paid is August 18th.
Who Uses Cash Accounting?
Cash accounting can only be used by small businesses because of some restrictions imposed by The Internal Revenue Service. These restrictions are;
- A corporation with average annual gross receipts that exceed $25,000,000 for the three previous tax years after indexing for inflation.
- A tax shelter.
Some other types of businesses that do use cash accounting include:
- Sole proprietorships and partnerships.
- Businesses that use single-entry bookkeeping.
- Small businesses with few transactions and employees.
- Businesses with no inventory.
- Businesses that don’t sell or buy goods and services on credit.
- Businesses that require payment at the time of sale.
What are The Advantages of Cash Accounting?
There are only a few advantages of cash accounting.
- It’s simple. Cash accounting is easy because you will only need to record transactions related to cash.
- Maintenance is easy. Compared to accrual accounting, cash accounting is easy to maintain because it is pretty straightforward.
- Single-entry accounting. Cash accounting is related to single-entry accounting in that the effect occurs only on one account and it makes things easier for the business.
What is The Difference Between Cash and Accrual Accounting?
The main difference between cash and accrual accounting is the timing of when revenue and expense are recognized. Accrual accounting records revenues and expenses before payments are received or issued which is in contrast to cash accounting. Cash accounting records revenue and expenses when actual payments are received or disbursed.