Cash Basis - vs - Modified Cash Basis…What’s the Difference?
Pure cash basis financial presentation is rarely used for businesses. Generally, it is limited to nonbusiness entities with very simple operations. Entities that might use pure cash basis of accounting include school activity funds, fairs, trusts, estates, and political campaigns. Revenues and expenses are recognized based on cash receipts and cash disbursements of cash, hence “cash basis”. It treats all disbursements of cash as an expense. Therefore, the purchase of an asset is recognized as an expense rather than an asset. The balance sheet ends up with only cash and equity and the income statement reflects all cash receipts as revenues and all cash disbursements as expenses.
What is the modified cash basis? See our next post, as we discuss the additional items reflected on the balance sheet.
Posted by David DuBois
