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Documentation -> Accounting/Bookkeeping -> Prerequisite Knowledge -> Modified Cash Method/Basis

 

The Modified Cash Basis can be any unholy hybrid of the Cash and Accrual Methods, but the most typical application of this method might be to address the short term accounts using the Cash basis while addressing the long term accounts using the Accrual Method. This might represent the best of both worlds for some organizations, but we will try to highlight the pros and cons below.

Benefits

Same simple and quick treatment of incomes and expenses as the Cash Basis.

Still gives an accurate account of cash on hand at any given time.

Gives a more accurate picture of the overall health of the business when compared to the Cash Method since long term accounts are addressed using the Accrual Method.

Drawbacks/Limitations

Could still give a misleading picture of the overall short term financial health of the company. Since revenue isn't recorded until it is actually received, work for several clients may have been completed with expenses already having been deducted from the books, but payments wouldn't be recorded yet. Alternatively, the payments from several past jobs could be received all at once, with the expenses having already been recorded in the previous month or quarter, making the books look unbalanced in the other direction.

The Modified Cash Method is not US GAAP compliant.

Lenders will likely expect or require that the Accrual Method be used. A certified audit by a CPA requires the accrual basis and The IRS requires some businesses to use accrual, as well. see pub 538 and this for more info on that.