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What is cash basis of accounting?

What is cash basis of accounting?

Solution

The cash basis of accounting is the simplest accounting method, under which transactions are recorded on the basis of the actual flow of cash into and out of the business — incomes are recorded when received and expenses when paid.

  1. Credit transactions ignored: a credit sale is not recorded until the cash comes in; for example, if goods worth Rs. 10,000 were sold in Chaitra but only Rs. 6,000 was received, only Rs. 6,000 is reported as revenue and nothing appears on the Chaitra 31 balance sheet.
  2. Suitability: it is less accurate in measuring profit, and is therefore appropriate mainly for small, cash-based businesses.

Explore more questions

  1. 1.

    "Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions," discuss.

    Practice
  2. 2.

    An unadjusted trial balance of a company are given below:

    Particulars Debit (Rs.) Credit (Rs.)
    Cash 300,000
    Bank 250,000
    Discount Allowed 7,000
    Plant and Machinery 200,000
    Purchases 215,000
    Debtors 90,000
    Particulars Debit (Rs.) Credit (Rs.)
    Interest on loan 8,000
    Salary 120,000
    Rent 70,000
    Capital 400,000
    Creditors 50,000
    Commission Received 10,000
    Sales 700,000
    12% Bank Loan 100,000
    Total 1,260,000 1,260,000

    Adjustment:

    a. Closing stock Rs. 40,000

    b. Prepaid rent was Rs. 10,000

    c. Outstanding interest on bank loan was Rs. 4,000

    d. Depreciation on Plant and Machinery at 15% per annum

    Required:

    i. Adjusted Trail balance

    ii. Statement of Profit and Loss a/c

    iii. Statement of Financial Position

    iv. Statement of Cash flow Statement

    Long question Practice
  3. 3.

    The financial transaction of a trader are provided below:

    a. Started business with cash Rs. 300,000, which was collected by issuing the shares of Rs. 100 each.

    b. Rs. 200,000 was deposited into bank.

    c. An equipment costing Rs. 100,000 was purchased and payment made by a cheque.

    d. An equipment costing Rs. 60,000 was purchased on credit.

    e. Sold goods on credit for Rs. 170,000.

    f. Received a cheque from debtor, Rs. 135,000 after deduction of 10% discount.

    g. Paid Rs. 47,500 to creditor after deducting 5% discount.

    h. Rs. 15,000 was paid for electricity bill.

    i. Paid wages Rs. 20,000 and office salary Rs. 25,000 by issuing cheques.

    j. Paid Rs. 20,000 as rent by issuing a cheque for the period.

    Required:

    • i. Journal entries

    • ii. T accounts (ledger) for sales, purchase, account receivable and account payable

    • iii. Triple column cash book

    • iv. Trial Balance

    Long question Practice
  4. 4.

    Define the source of documents. Also, write down the types of source of documents.

    Practice
  5. 5.

    "The purpose of financial statement analysis is to reveal financial strengths and weaknesses of the firm," discuss.

    Practice
  6. 6.

    a) On 31st Chaitra 2075 Bank Statement of KK Company disclosed a balance of Rs. 25,000 and Cash Book showed the balance of Rs. 30,000.

    i. Number of cheques were deposited in the bank but on 31st Chaitra, 2075, a cheque for Rs. 5,000 was not credited in the Bank Statement.

    ii. Cheques issued of Rs. 8,000 but only Rs. 3,000 presented before 31st Chaitra.

    iii. Notes receivable collected by the bank Rs. 5,000.

    iv. Cash of Rs. 6,000 deposited by the company on Chaitra was recorded by the bank as Rs. 4,000.

    v. A cheque for Rs. 8,000 received from a customer was returned by the bank due to insufficient fund with the bank.

    Required : Bank Reconciliation Statement as on 31st Chaitra 2075.

    b) Differentiate between account receivable and note receivable.

    Long question Practice