The Pros and Cons of Cash Accounting

The cash basis is a recording mode that can use reduced some companies. Before applying it, it is important to be aware of its advantages and disadvantages . Indeed, although it appears attractive a priori, it sometimes causes some disappointments. Compta-Facile answers the question: what are the advantages and disadvantages of cash accounting ?

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The Benefits of Cash Accounting

The disadvantages of cash accounting

The Benefits of Cash Accounting

The simplicity

The cash basis is a management method of accounting entries extremely simple : the company is limited to record transactions that result in a financial flow. All others are not counted. Therefore, the cornerstone of this technique is the bank statement (and possibly cash fog). Just follow it and record the operations in chronological order.

The classification of accounting documents is also simplified. It is advisable to take the bank statement and insert behind all the supporting documents which gave rise to the disbursement or collection, classified in order of appearance on the statement: purchase invoices, sale invoices, statements of charges social contributions, contributions calls, notices of property contributions from companies, etc.

Time saving

The simplicity of the method allows anyone who uses it to save considerable time compared to accrual accounting . When it comes to using accounting software, a single journal is sufficient (a treasury journal commonly known as a “bank journal”).

In addition, the number of entries is greatly limited , whether during the year or at the end of the financial year. It will be recalled that, in accrual accounting, receivables and debts must be recorded in separate journals from the one who will record their financial outcome. The sums of money pass through balance sheet accounts before being settled; which considerably increases the number of accounting records.

Relatively low cost

Cash accounting is quicker to implement and requires less time in configuration or implementation. For this, it helps to reduce the score in accounting and administrative matters. Its cost is relatively low for the company.

Thus, if it is the manager himself who takes care of it, he will spend less time there and will be able to devote what he has left to his core business. If, on the contrary, he delegates his accounts to a chartered accountant, the professional’s fees will be lower than if he were under accrual accounting.

The disadvantages of cash accounting

More difficult monitoring of customers and suppliers

By using cash accounting, receivables are not recorded when they are acquired and debts when they are incurred. As a result, company managers only become aware of these when they are paid. It is therefore not easy to follow the suppliers to pay or the customers awaiting collection thanks to the accounting .

To remedy this, it is necessary to equip yourself with a monitoring tool: an Excel spreadsheet (if there are few invoices) or a billing management solution (estimate-invoice-collection).

An incomplete picture given by the annual accounts

Insofar as the accounts are established by means of cash accounting, they do not identify the debts and receivables of the company, nor the risks that it incurs. They therefore give a rather “imperfect” picture of the company’s heritage and its performance (the balance sheet and the income statement).

The information contained in the accounts is less complete than that given by accrual accounting. Under these conditions, the intermediate accounting situations have no real interest.

Significant variations in expenses from one year to the next

This is the last drawback of cash accounting. When the expenses or revenues of a company overlap from one year to the next, a significant difference can occur in the result .

To illustrate this, take the case of a service provider who had to advance subcontracting costs for 5,000 euros in December N. In return, he invoiced his client for 10,000 euros, a sum which was not settled only in January of the following year (N + 1). At the accounting level, the accounts will bear a charge of 5,000 euros in N and the corresponding product (10,000 euros) will only be recognized in the accounts in N + 1. This can have important social or tax consequences; social charges and taxes being calculated on the profit made for a year.

 

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