Part 2: Cash Basis of
Accounting and Its Application in Different Contexts
Continuing from the foundational aspects of accounting and
financial statements, this part delves into specific areas of accounting
practices, focusing on the cash basis of accounting and its implications across
various organizational activities and requirements.
Others
Accounting Policies
Accounting policies lay the groundwork for how financial
transactions are recorded and reported. For entities operating on a cash basis,
it's crucial to transparently disclose this choice, as it significantly
influences the recognition of revenue and expenses. Unlike the accrual basis,
which records transactions when they are earned or incurred, the cash basis
records transactions only when cash is received or paid. This method provides a
straightforward view of cash flow but may not fully represent an entity's
financial position or performance over a period.
Cash Flow Statements
For cash basis entities, the cash flow statement is inherently
reflective of their financial activities, given that it tracks the actual cash
movements in and out of the business. While some smaller entities might not be
legally required to prepare cash flow statements, doing so can offer valuable
insights into their liquidity and financial health.
Adjustments for Mistakes
Mistakes in financial records, when identified, need to be
corrected promptly. For cash basis accounting, this typically involves adjusting
the cash records to reflect the accurate amounts of cash received or paid. It's
important to document these adjustments clearly to maintain the integrity of
the financial records.
Information by Location or Business Type
Entities that operate in multiple locations or have diverse
business operations may need to segment their financial information
accordingly. This is particularly relevant for cash basis accounting, where the
timing of cash flows can vary significantly across different operations. Segmented
reporting can provide more meaningful insights into the performance and
financial status of each segment.
Dealing with Related Parties
Transactions with related parties need to be conducted and
reported with a high level of transparency, especially under cash basis
accounting. Since these transactions can involve non-market terms and timings
of cash flows, disclosing them clearly helps in understanding their impact on
the financial statements.
Taxes
The treatment of taxes under cash basis accounting is focused on
the recognition of tax expenses and liabilities when the payment is made or
received. Entities must carefully track their cash transactions related to
taxes to ensure accurate reporting and compliance with tax laws.
Books of Account to Be Maintained
Entities should maintain detailed records of:
·
Money Received: Including the source,
nature, and amount of cash inflows.
·
Money Spent: Detailing the amount,
nature, and purpose of cash outflows.
·
Assets & Liabilities: Tracking what the
entity owns and owes, focusing on tangible cash and cash-equivalent assets and
actual liabilities.
Formats of Financial Statements
The cash basis of accounting influences the presentation and
content of financial statements, including:
1.
Balance Sheet: Might not fully
represent the entity's obligations or resources not yet reflected in cash
flows.
2.
Statement of Profit and Loss: Reflects the financial
results based on cash received and paid within the period.
3.
Notes and Other Information: Should include
disclosures about the use of cash basis accounting and its impact on financial
statements.
4.
Cash Flow Statement: Directly correlates
with the entity's cash transactions, providing a clear view of cash movements.
Conclusion
Understanding and applying the cash basis of accounting requires
careful consideration of its implications on financial reporting and
compliance. Entities must ensure transparent disclosure of their accounting
policies and maintain accurate records of their cash transactions. By doing so,
they can provide meaningful financial information to stakeholders and comply
with regulatory requirements, while also managing their financial health
effectively.
