Explain cash based accounting.

Cash based accounting means, it records only those transactions relates to cash. That means transactions of revenue and expenses are recorded when payments are made or received through cash only. It is a single entry accounting.

  • It is useful for simple accounting system.
  • It is used, if inventory is to be valued.
  • It is useful, when audit is not necessary.
  • It is useful in services business.

Reasons why companies prefer cash based accounting are given below −

  • Single entry accounting.
  • Few financial transactions.
  • Very few employees.
  • Few valuable physical assets.
  • Very few inventory, supplies and cash in bank.
  • Sole proprietorship.
  • Privately held.

Legal reporting includes −

  • Supports company’s income tax reporting.
  • Paid government taxes.
  • Forecast future budgets and sales revenue.
  • Income tax withholding.
  • Real time visibility.

Advantages are given below −

  • Easy to understand.
  • Useful for smaller companies.
  • Easily created.
  • Easily maintained.
  • Doesn’t need complicated software.

Disadvantages are as follows −

  • Does not give important information.
  • Can’t estimate exact financial position of the firm.