Characteristics of Cash Based System

Characteristics of Cash Based System

In this article we would explain the Characteristics of cash based system. These characteristics can be explained in terms of revenue recognition on receipt bases, expenses recognition on payment bases, lack of accuracy, suitability for small business etc.

Important characteristics of cash bases system have been described below;

1.    Revenue on Receipt bases:

In cash based system revenue is recorded in the books of accounts on receipt bases. Where in accrual based system the revenue is recorded on accrued/incurred bases (when revenue is earned).

2.    Expenses on payment bases:

In cash based system the expenses are recorded in the books of account on payment bases (when expenses are actually paid). Where under accrual system, the expenses are recorded on accrued/incurred bases (when the related benefit received by the company). For example, In accrual system salaries are recorded, when services have been performed by the employees.

3.   Does not Reflect True profit:

Cash based system does not reflect the actual profit earned by the business during the period, because revenue and expenses are recorded on the bases of payment, which is not an accurate bases and therefore actual profit cannot be calculated under cash based system.

4.   True Financial position

In Cash based system all assets and liabilities are not accounted for in the books of accounts. Thus statement of accurate financial position cannot be  prepared under cash bases system of accounting and thus actual financial position or true picture of business is not known to the world.

5.   Small  business Option

Cash bases system is used by the small businesses, where most of the financial o r business transactions are cash based.One important example of such business is a small retail store . This system is also preferred by the small scale business due to its low cost and simplicity.

6.   Simple to operate

Cash based system is simple to understand and apply and does not require special knowledge of accounting.

Characteristics of cash based system are listed below

Some important characteristics of cash based system are listed below

1.    Cash based system is simple & easy.

2.    Cash bases system is economical.

3.    Cash based system does not reflect the actual profit.

4.    Revenue is recorded on receipt bases.

5.    Expenses are recorded on payment bases.