Advantages of the Cash Basis of Accounting

The principal advantage of cash basis accounting is its simplicity, and the ease with which nonaccountants can understand and keep records on this basis. The only time a transaction is recorded under this basis of accounting is when cash has been received or expended. A simple checkbook may be all that is needed to keep the financial records of the organization. When

financial reports are required, the treasurer just summarizes the transactions from the checkbook stubs. This sounds almost too easy, but a checkbook can be an adequate substitute for formal bookkeeping records, provided a complete description is recorded on the checkbook stubs. In lieu of a “checkbook” a simple accounting software package might also be used.

Some larger organizations, including those with bookkeeping staffs, also use the cash basis of accounting primarily because of its simpler nature. Often the difference between financial results on a cash and on an accrual basis are not material, and the accrual basis provides a degree of sophistication not needed.

Another reason organizations often keep their records on a cash basis is that they feel uneasy about considering a pledge receivable (often called a contribution receivable) as income until the cash is in the bank. These organizations frequently pay their bills promptly, and at the end of the period have very little in the way of unpaid obligations. With respect to unrecorded income, they also point out that because they consistently follow this method of accounting from year to year, the net effect on their operating results in any one year is not material. Last year’s unrecorded income is collected this year and tends to offset this year’s unrecorded income. The advocates of a cash basis say, therefore, that they are being conservative by using this approach. Recent financial statement restatements by some very well-known public companies have contributed to the view that an organization’s cash flows may be a more meaningful measure of performance than an accrual-based “earnings” amount.

Taken From : Wiley Not-for-Profit Accounting Field Guide 2003

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