Cash basis of accounting recognizes revenue at the time when cash has been received, and recognizes expenses when cash has been paid. Cash revenues may not be recorded at the same time that expenses were used to raise those revenues. For example, an entity may not have received cash for performing a service during a specific reporting period, but may have incurred expenses that will result in future cash revenues to be reported during a later reporting period. Or, in another instance, an entity might receive a cash payment for services rendered during a particular reporting period, but has deferred payment of related expenses to a later reporting period.
These examples illustrate how the true financial performance of an entity can become somewhat distorted using the cash basis of accounting. Consequently, cash basis financial statements are a departure from the Generally Accepted Accounting Principles (GAAP), the industry-wide standards used for financial reporting.
This article is the fourth installment in a series of articles entitled, "On What Basis Are You Accounting for That?" addressing the following specific topics: