What is the modified cash basis of accounting?

The modified cash basis of accounting uses elements of both the cash basis and accrual basis of accounting. Under the cash basis, you recognize a transaction when there is a change in cash; thus, the receipt of cash from a customer trigger the recordation of revenue, while the payment of a supplier triggers the recordation of an asset or expense. Under the accrual basis, you record revenue when it is earned and expenses when they are incurred, irrespective of any changes in cash.

The modified cash basis establishes a position part way between the cash and accrual methods. The modified basis has the following features:

• Records short-term items when cash levels change (the cash basis). This means that nearly all elements of the income statement are recorded using the cash basis, and that accounts receivable and inventory are not recorded in the balance sheet.
• Records longer-term balance sheet items with accruals (the accrual basis). This means that fixed assets and long-term debt are recorded on the balance sheet, and depreciation and amortization in the income statement.

The modified cash basis provides financial information that is more relevant than can be found with cash basis record keeping, and generally does so at less cost than is needed to maintain a set of full-accrual accounting records. Thus, it can be considered a cost-effective approach to bookkeeping.

There are no exact specifications for what is allowed under the modified cash basis, since it has developed through common usage. There is no accounting standard that has imposed any rules on its usage.

The modified cash basis is not allowed under Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), which means that a business using this basis will need to alter the recordation of those elements of its transactions that were recorded under the cash basis, so that they are now accrual basis transactions. Otherwise, an outside auditor will not sign off on its financial statements.

Conversely, the modified cash basis may be acceptable as long as there is no need for the financial statements to be compliant with GAAP or IFRS; this may be the case if the financial statements are only to be used internally.

Related Topics

Accrual basis of accounting
Cash basis of accounting
Double entry accounting
How to convert accrual basis to cash basis accounting
How to convert cash basis to accrual basis accounting