Modified Cash Basis

What Is Modified Cash Basis?

Modified cash basis is an accounting method that consolidates components of the two primary bookkeeping practices: cash and accrual accounting. It tries to defeat the two universes, recording sales and expenses for long-term assets on an accrual basis and those of short-term assets on a cash basis. The goal here is to give a clearer financial picture without dealing with the costs of switching to out and out accrual accounting.

Grasping Modified Cash Basis

To comprehend how a modified cash basis functions, it is first essential to break down how traditional bookkeeping practices are impacted by function.

Cash basis accounting perceives income when it is received and expenses when they are paid for. Its most huge advantage is its simplicity.

Conversely, accrual accounting perceives income when a sale is satisfied as opposed to when it is paid for and records expenses incurred, regardless of cash movement.

Accrual accounting is a somewhat more convoluted method. In any case, it benefits from empowering a company to match revenue and its associated expenses and comprehend what it costs to run the business every month and the amount it makes.

The modified cash basis gets components from both cash and accrual accounting, contingent upon the idea of the asset. It comprises of the following elements:

• It records short-term assets, for example, accounts receivable (AR) and inventory, on a cash basis on the income statement, similar to cash basis accounting.
• Longer-term assets, for example, fixed assets and long-term debt, are recorded on the balance sheet. Like accrual accounting, depreciation and amortization appear on the income statement also.

Advantages and Disadvantages of Modified Cash Basis

Advantages

The modified cash basis method can better balance short-term and long-term accounting things by borrowing components from the two strategies. Short-term things, similar to a regular month to month utility expense (a bill), are recorded by the cash basis (as there is a connected inflow or outflow of cash), which brings about an income statement populated principally with things in view of the cash basis. Long-term things that don't change inside a given financial year, for example, a long-term investment property, plant, and equipment, are recorded utilizing the accrual basis.

Accrual basis methods produce a clearer image of business performance while utilizing cash basis records for different things helps keep costs down where conceivable; keeping a set of complete accrual accounting records is additional tedious.

Disadvantages

On the off chance that financial statements are subject to formal surveys, for example, an analysis performed by auditors, investors, or a bank, the modified cash basis method will demonstrate deficient. The modified cash method may just be utilized for internal purposes since it doesn't agree with International Financial Reporting Standards (IFRS) or the generally accepted accounting principles (GAAP), which frame what procedures companies must follow while preparing their authoritatively reported financial statements.

This makes a modified cash basis accounting popular with private companies. It additionally means that publicly traded companies utilizing this method can't get their financial statements closed down by auditors. Consistency is required, so transactions recorded on a cash basis must be switched over completely to accrual. This is so on the grounds that, under IFRS and GAAP, public companies are required to report their financials utilizing just the accrual method of accounting in light of its matching principle.

For tax reporting purposes, companies with average annual gross receipts of under $25 million for the last three back to back years might pick the cash or accrual accounting method.

Features

• The modified cash method may just be utilized for internal purposes since it doesn't follow International Financial Reporting Standards (IFRS), or the generally accepted accounting principles (GAAP).
• Accrual basis methods produce a clearer image of business performance while utilizing cash basis records for different things assists with keeping costs down where conceivable.
• The modified cash basis is a bookkeeping practice that joins components of the two major accounting methods: cash and accrual.
• Both IFRS and GAAP expect that public companies utilize the accrual method of accounting for their financial statements, for certain admonitions for GAAP.
• Long-term assets are recorded on an accrual basis and short-term assets are registered utilizing the cash accounting method.