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Cash basis is an accounting method that recognizes revenue and expense only when cash is paid or received. The cash basis method thus focuses exclusively on the company's most liquid and tangible asset, namely, cash. The cash basis method is distinguished from the accrual method, which recognizes revenue when earned and expenses when incurred. The advantage of the cash basis method is that it foregoes estimates and recognizes revenue and expense only when an actual event has occurred, i.e., the receipt or payment of cash. But the cash basis method fails the matching principle: expenses must be recorded in the same period as the revenues it helped to earn. Under cash basis accounting, companies can record wildly fluctuating income when cash receipts are irregularly distributed. The cash basis method also allows companies to shift expenses from one period to the next merely by delaying payment. Under Generally Accepted Accounting Principles, the cash basis of accounting is unacceptable for public companies. |
