Question

What do you think of the modified cash basis of accounting? Can you briefly explain how it works? (8 sentences)

Answer 1

Modified Cash Basis of Accounting

• Modified cash basis is one of the methods of accounting in which financial statements are prepared using the cash basis of accounting along with some accrual adjustments. Modified cash basis is also known as hybrid accounting as it uses aspects of both cash basis and accrual basis accounting.
• Under cash basis accounting, revenue is recognized when the cash is received and expenses when they are paid whereas with accrual basis, revenue is recorded when it is earned and expenses when they are incurred.
• With modified cash basis accounting, you can record short term items like recurring expenses (rent, facilities, etc) in the income statement according to cash basis and long term items according to accrual basis.
• Modified cash basis accounting provides a more accurate financial view and gives an extra level of insight into your financial statements. Though modified cash basis is a little more time-consuming than the cash basis but it also costs less than the accrual basis accounting.
• Modified cash basis accounting can be used in small businesses, retailers, manufacturers, and if the business is growing. It can be used for internal purposes but you can't use this method if you need audited financial statements.
• It is not GAAP or IFRS compliant and you might need to adjust some transactions to remain complaint but not all companies need to follow GAAP's standards.