Accounting is more than just the study of money—it is a study of the financial framework, the scrutiny of every detail in order to ensure that the flow of cash in a business or organisation is stable. If you are a starting business owner, you should prepare for the accounting processes that you have to undergo. One of the best facets of accounting that you have to understand is modified cash basis. Below are the factors that can help you understand the nature of this accounting process, and how it is important to your business.
The basics
Modified cash basis helps you organise the financial accounting sector of your business. With this process, you can record incoming and outgoing transactions so they would not reflect as errors. Modified cash basis uses two main elements: cash basis and accrual basis. The cash basis is about the recordation of revenue in real-time. The accrual basis, on the other hand, is about the accounting of revenue when it is earned and expenses when they are incurred, no matter how many changes are present in the cash at hand.
Here are other varying points between cash basis and accrual basis:
- Cash Basis is short-term. Through cash basis accounting, you must record all items when cash levels change. Accounts receivable and inventory items are not included in the balance sheet through cash basis.
- Accrual Basis is long-term. Fixed assets and long-term debts are the facets covered by the accrual basis process. Depreciation and amortisation are also included in the income statement to monitor the financial track of the business.
Modified cash basis and double-entry accounting
To have an organised modified cash basis process, you must rely on double-entry accounting. With this, the resulting transactions can help you create detailed financial statements. You also need to remember that you cannot have a modified cash basis accounting by using the single-entry system. Reliable accounting software can help you configure double-entry accounting integrated with modified cash basis.
Since the modified cash basis uses double-entry accounting, this is essential for a growing business or company. Using single-entry accounting with modified cash basis will make things harder since the numerous transactions that can determine your company’s growth will not be covered. There are no strict limitations when it comes to the usage of modified cash basis. If you are planning to use modified cash basis, do it in a continuous manner so that your financial statements are intact over long stretches of time.
Modified cash basis and GAAP
Despite the flexibility of the modified cash basis, it is not declared official by the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). If your business is using the modified cash basis, you need to alter the recording process of the financial elements so they will reflect as accrual basis. If you fail to do so, an external auditor will not validate the financial statements of your business. However, you can use modified cash basis as long as you do not have to issue financial statements that require the GAAP and IFRS standards. Hence, it is viable to use modified cash basis within the parameters of your business.
Modified cash basis can make any accounting process easy. Modern accounting software for business can help you configure your accounting process so that it follows the modified cash basis set-up. Bear in mind that choosing between cash basis and accrual basis is a matter of strategy setting for your business.
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