About Cash Basis Accounting

In cash basis accounting, the income of a company is computed for an accounting period by subtracting the cash payments from the cash receipts for operations. Some concerns about this method of accounting include:

• Cash basis accounting is not in conformity with Generally Accepted Accounting Principles (GAAP).
• This method may lead to incorrect evaluations of a company's operating results because the receipt and payment of cash may occur much earlier or later than the sale of goods or the providing service to customers (benefits) and the related costs (sacrifices).
• A company's books maintained on a pure cash basis generally have no balance sheet.