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Cash Basis Accounting (Definition) | Example | Pro's & Con's - YouTube
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friends today we are going to learn a to
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tutorial on - cash basis accounting as you can see a bigger recording over here that
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the big article over here the cash basis
of accounting is a way of recording the
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accounting transactions for the revenue
and the expenses which are made in
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specifically cash that is either cash is
received or any payments is made in cash
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so basically what is cash basis
accounting to start at the very initial
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say at the cash basis of accounting is a
way of recording the accounting
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transactions for revenue and expenses
which are made in cash either in cash or
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a suit or payments is made in cash so
this method is generally followed by
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individuals and small businesses which
have no inventory basically complete no
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inventory so it is very simple method
and can be easily be tracked cash basis
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accounting only considers basically two
types of transaction that is the cash
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inflow and there's then this cash
outflow in this method a single entry
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system is basically followed is right
for you single entry system is been
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basically followed for according the
entries made since there is no tally
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between the revenue in the expenses in
that particular accounting period so
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comparison of the previous periods are
not possible let's take a quick example
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on cash basis accounting like for
example let's say let's say there's this
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guy called mr. Ramesh ah Ramesh owns a small business for which he has sent out
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an invoice that's on Thursday to the
customer but it doesn't receive the
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pelling amount till let's say Sunday so
the income is recorded against the
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Sundays deed in the accounting books so
Ramesh does not include the sales done
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via credit basis or great accounts
unless the payment is received in cash
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now let's understand some of the
features
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of cash basis accounting CDA first it
follows a single entry system second it
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records only the cash payments and that
is the cash receives received in the
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cash expended third and the most
important thing is it records or it is
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basically a very simple process fourth
it's not a good accounting not at all a
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good accounting tool
it lacks building the error checking
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process error checking tool basically
6th is that it mainly focuses on
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the expenses and does not match us the
expenses and the revenue which is called
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as the matching concept now where
exactly is this a cash basis accounting
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they have been used whereas this
particular been used so the cash basis
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accounting news in following cases when
a business uses a single entry system
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then the cash basis of accounting is
used second it is used when the business
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does not sell it does not sell on its
own grid that is whenever customer
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purchase a product or his sole payment
must be immediately be done by the cash
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or cheque bank transfers a third party
credit debit card and so on and so forth
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third the business has a very few
employees fourth when the
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business owns a little you can say less
expensive business supporting physical
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assets or no inventory that is the
business does not have building huge
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officers or furniture extensive
computer database system production
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machinery and so on and so forth
5th the company is basically a sole
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proprietor business or privately held
hen has no binding to the population
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income statement balance sheets or
financial and other statements now the
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cash basis accounting for the small
business let's have a look at some some
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example on the same as you can see this
is basically a ledger this is unlike it
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all the details on 1st April there
was a bank balance of 200 and
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the folders and pens which was one x
once again in expense 15 so this
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has reduced then there was a sale by mr.
e they 54 income again so this is how the
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expense and income has been recorded
it's like there's an ups and downs and
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this plus and minus according to which
the bank balance changing the final you
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know you can say the total that is 168
which was been income that was recorded
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expenses was 214 which led to
the reduction in the bank balance to 153
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.5 which will be carry forward
again so based on this let's understand
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the journal entry on the above thing so
the cash balance the cash book balance
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is 153.5 as we know to
hear her you add any unpleasant check if
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any that was in our case simply chairs
127 the subtotal comes down to 280 .5
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less deposit not yet showing 54
Silva mister P Roy because that was the
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income part and that will be the next
net bank balances to 226.
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50
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so let's understand based on this the
advantages and the disadvantages of CPA
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let's start with the advantages on this
note since it is the single entry system
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and simple it is easy first it is very
easy to understand with very less on no
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knowledge and the background in
difference and accounting
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second there is no trained bookkeeper or
accountant is required to implement and
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maintain the system the third is the
cash basis accounting does not require
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any complex transaction a complex
accounting software hence a business can
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easily maintain a cash basis Single
entry system in a notebook you can say
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for a basically on a simple spreadsheet
fourth now since it attracts the cash
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inflow and the cash outflow a firm knows
that how much actual cash it has given
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for a period fifth the business can
accelerate the payments to reduce its
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taxable profits and thereby deferring
the tax liability then let's discuss the
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disadvantage of cash basis accounting
the cash basis accounting gives us less
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accurate you know you can say less
accurate results since the timing of the
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cash flow do not give the exact timing
of the change in the financial condition
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of the business second this type of
accounting results can be manipulated
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and you can say that by not by not cash
received our checks and changing
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the payments timings of the liabilities
third this method does not generate any
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accurate financial statement Hence
lenders refuse and lend money to
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business having cash basis accounting
fourth since the results are often
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inaccurate management reports cannot be published by firms using the cash basis
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accounting this method is basically
fifth it is unable to give owners and
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managers important information
which is really very crucial for the
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evaluation the financial positions at
the firm financial position 6th since
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there is no error checking system you
can say basically built-in in the method
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the error may not be notice until the
firm receives a bank statement with an
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unexpected low account balance on an or
drone account so let's finally discuss
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the difference between the cash basis
accounting and the accrual accounting
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well I'll just buy forget over your CBA
and II over here as accrual we'll start
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with a cash basis accounting this is
basically simple simple system that
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keeps a record of the business of the
cash flow this is basically a
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complicated method for this apps for
small business
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sole proprietor firms that mostly deals
with transaction in cash for case of
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accrual suitable for business that don't
get paid right at the moment this gives
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a right a clear picture of the amount of
the cash in hand in bank account this
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gives a clear picture for the true
financial position of the business over
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here it does not reflect any money that
is owed to you or money you owe to
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others but over here you record money
owed to you and money you owe to others
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so let's make define an final conclusion
based on this to conclude generally cash
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basis accounting method of accounting is
is idle for small businesses due to the
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number of shortcomings in the particular
method of the accounting which we
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discussed in all the case come is
generate generally move away from the
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cash basis accounting to accrual
accounting method of after they grow in
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initial startup stage finally which
method of accounting of company follows
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cash will occur accrual is supposed to
follow the that for both accounting and
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the tax things so that's it for this
particular topic if you have learned and
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