Cash basis accounting in bookkeeping

Cash basis accounting in bookkeeping

For businesses and organizations, several ways of accounting for income and expenses have been developed and implemented. One of them is the cash accounting method. Most often, it is used by companies that have a small turnover and, consequently, minimal revenue. Let’s look at this method in more detail, and for clarity, let’s review some examples.

Cash basis accounting definition

The definition in simple words sounds the following way: in an enterprise whose income is recognized directly on the day of transfer of funds to its bank accounts or the cash register, the method of cash accounting for costs and profits is used.

This principle is clear and convenient for small organizations or individual entrepreneurs, as well as if the organization works by providing deferred payment to customers. However, who has the right to apply the specified accounting system, and in which cases this application is mandatory? After all, the cash method of accounting means that receiving an advance payment is also considered income, and you must pay taxes, even if the work has not yet been completed and the advance may have to be returned. Now, you know the answer to “What is a cash basis accounting?”. 

Cash basis accounting in bookkeeping

Cash basis accounting explanation

First of all, it should be said that the cash method can be used in different tax systems:

  • general taxation system;
  • simplified taxation system.

The rules of working with cash accounting in each of the systems differ. 

Cash basis accounting examples

The cash accounting method is characterized by the fact that the income is determined by the actual receipt of funds to the cash register or to the current account. In addition, the income will be considered received if the obligation to pay is repaid in another way – offset, compensation, etc. For example, if an agreement is reached to repay the debt for the work performed and the payment is less than the amount owed, the income will reflect the actual amount received and not the amount that should have been paid.

An important feature of the cash accounting method is the fact that the received advances are also recorded as income. It is obvious that the advance can be returned – the client may change his mind, the organization may not fulfill its obligations; that is, the situation with the return of the advance often occurs. In this case, it is specifically stipulated that if the advance is later returned, the income can be reduced. It should be taken into account that you can reduce the income received under the simplified system with cash-based accounting.

Cash method of accounting limitations

We can’t use the cash accounting method in the general taxation system at the following organizations:

  • banks;
  • microfinance organization;
  • credit consumer cooperative;
  • participants in the trust management agreement;
  • participants in a simple partnership agreement.

This means that each quarter, you need to analyze the revenue received for previous periods and calculate an average amount. In this case, a calendar year is the period of reference taken into account in the last four quarters. That is, to verify the application of the cash method in the third quarter it is necessary to take data from the 1st, 2nd and 3rd quarters of this year, 4th quarter of the previous year. If the total revenue exceeds the set amount, the taxpayer will need to apply the accrual method starting from January 1, instead of cash basis accounting.