Cash principle or cash basis is the process of recording accounting transactions where transactions are recorded when receiving cash or when issuing cash. On a cash basis , income is recorded when receiving cash, while costs are recorded when issuing cash.
Revenues and expenses will be reported in the income statement in the period in which cash is received (for income) or cash is paid (for expenses). So, it can be concluded here that income and expense transactions that will be reported in the income statement are transactions that involve cash inflows (for income) or cash outflows (for expenses).
On this cash basis income will not be recorded even if the goods or services have been given to the customer. The income is only recognized when the customer pays a sum of money or cash to the company.
Strengths and Weaknesses of the Cash Principle
The process of recording cash basis cannot be separated from its own strengths and weaknesses. For example, in terms of the advantages of the cash basis method : direct income can be recognized when cash is received and the risk of uncollectible income becomes non-existent. Meanwhile, cash basis weaknesses include inaccurate information because it does not indicate the proper financial position and has an impact on management policies that will be difficult to do.