Meaning and definition of Cash Accounting
Cash accounting can be explained as an accounting method which involves recording the receipts during the period of being received, and the expenses are recorded in the period of being actually paid for.
As explained by Investopedia, basically, when cash is received for a sale, it is recorded in the books as a sale. This is different from accrual accounting, which involves expenses and revenue being recorded at the time of being incurred.
Moreover, the cash accounting method can reduce the book keeping costs significantly, for it is simpler in addition to being less time consuming as contrasted with the accrual method of accounting.
Advantages and disadvantages of cash accounting method
There are unambiguous advantages to the cash accounting method for tax purposes. Primarily, cash accounting ascertains that the taxes are not paid on dues which have not yet been received thus improving the cash flow in addition to ensuring that the availability of funds for tax expenditure. This can be important specifically for individuals and small sized businesses which involves restricted cash flow at certain times. For companies indulging in great deal of cash business and not maintaining large inventories, cash accounting can prove to be a reliable and convenient method of tracking profits and expenses without demanding a good deal of book keeping.
Besides the aforesaid disadvantages, cash accounting method also features certain disadvantages. Being simple to use, the method does not allow for tracking the real date of sales and purchases. Also, it generally does not provide a way of matching these transactions to some particular inventory items. Moreover, there are no records for accounts receivable and accounts payable. This can, however, lead to problems for businesses which do not receive immediate payments for goods sold.Adding more to the point, cash account6ing system does not involve recording partial payments, the balance sheet for a cash accounting system does not reveal all the due monies. Moreover, if scrupulous records are not maintained for these outstanding balances owing or due, the companies might not receive or make payments in a well-timed manner, if at all.