Advantages of Cash Basis of Accounting

Cash basis of accounting offers the following advantages for recording financial transactions:

(i)    Reliability is increased because transactions are recorded only when all phases of transactions are complete.

(ii)    Recording the transactions is simple because fewer estimated and judgments are required. This method has special advantages for financial institutions such as banks:

(a)    It will reflect true and correct financial positions.

(b)    Only the amount of interest which is realized in cash will be treated as income and so, to the extent correct profitability of the institution will be shown.

(c)    It will improve the liquidity position as unnecessary income tax or profit which is not realized in cash would not be payable.

(d)    Recovery of dues will be improved as the financial institutions will make efforts for higher recovery in order to show the profit in the annual accounts. The profit is based on higher recovery of interest. It must be noted that utmost care will have to be exercised while designing the procedural system for maintenance of books of accounts under the cash basis of accounting.

Suitability: The basis of accounting is also suitable only in some other cases (in addition to the financial institutions) as well:

(i)    Where the organization are very small or in the case of individuals, it is very difficult to allocate small amounts between accounting period and

(ii)    Where credit transactions are almost negligible and collections are uncertain, e.g., in the case of doctors or advocates, firms of chartered accountants etc., if the income of the profession is based on the bills of the customers, the income of the profession is based on the bills to the customers. Hence the cash basis is the only desirable basis of accounting in their case.

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