Modified Cash Basis of Accounting

Some not-for-profit organizations use a “modified cash basis” system of accounting. On this basis of accounting, certain transactions will be recorded on an accrual basis and other transactions on a cash basis. Usually, on a modified cash basis all unpaid bills will be recorded on an accrual basis but uncollected income on a cash basis. However, there are many different variations.

Sometimes only certain types of unpaid bills are recorded. Payroll taxes that have been withheld from employee salaries but which have not yet been paid to the government are a good example of the type of transaction, not involving cash, which might be recorded. These taxes are just as much an obligation as the salaries.

On a modified cash basis it is not necessary for the organization to have a complex set of books to record all obligations and receivables. In small and medium-sized not-for-profit organizations, it is sufficient to keep the records on the cash basis and then at the end of the month tally up the unpaid bills and the uncollected receivables and either record these formally in the books through journal entries or record them through a worksheet in the manner described above. Under the cash basis, one of the practical ways some smaller organizations use to record all accrued expenses is to hold the disbursement record “open” for the first four or five days of each month. This allows the bookkeeper to pay last month’s bills as they arrive about the first of the month and record them in the prior month’s records. While the organization actually pays such amounts in the first few days of the new period, it considers the payment as having been made on the last day of the prior period. This means that the organization does not show accounts payable but instead a reduced cash balance. This is frequently a useful practice for reporting internally to the board because it gives reasonable assurance that all expenditures incurred are recorded in the proper period. In financial statements prepared for external use, such payments subsequent to the end of the period should be shown as accounts payable instead of a decrease in cash.

Legal Requirements

For some organizations soliciting funds from the public, there are legal requirements with respect to using the accrual basis of accounting. In New York State, for example, not-for-profit organizations which are required to report to the state must use the accrual basis of accounting. However, even in New York State, the requirement is not that the records be kept on an accrual basis, but only that the organization file reports prepared on an accrual basis. This means the organization could still keep cash-basis records throughout the year, provided it adjusts them to accrual basis for report purposes. If an organization is required to file reports with one or more state agencies, it should examine the instructions accompanying the report very carefully to see what the reporting requirements are.

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

Related posts:

1. Advantages of the Cash Basis of Accounting The principal advantage of cash basis accounting is its simplicity,...
2. Advantages of the Accrual Basis of Accounting In many instances, the cash basis of accounting just does...
3. Combination Cash Accounting and Accrual Financial Statements One practical way to avoid the complexities of accrual basis...
4. Key Differences between Not-for-Profit and Profit Organizations (3) In commercial or business enterprises, there is no such...
5. Cash-Basis Financial Statements For organizations that choose to present their financial statements on...

Related posts brought to you by Yet Another Related Posts Plugin.