Cash Basis Accounting Overview

A set of flashcards covering key concepts related to cash basis accounting as discussed in the provided lecture notes.

Cash Basis Accounting

A method of accounting that recognizes revenues when cash is received and expenses when cash is paid.

Insurance Expense reporting in Cash Basis

In cash basis accounting, insurance expenses are recorded in the period when payment is made, not when coverage is received.

$2,400 Insurance Payment

The insurance payment made on December 1, year one, is fully expensed in that period under cash basis accounting.

Insurance Expense in Years Two and Three

No insurance expense is reported in years two and three under cash basis accounting, despite being insured during those periods.

Matching Principle

The principle that expenses should be matched with the revenues they help to generate; not followed in cash basis accounting.

GAAP

Generally Accepted Accounting Principles, which do not permit the use of cash basis accounting due to its lack of matching expenses with benefits.

Balance Sheet in Cash Basis Accounting

Typically does not include an insurance asset because the premium is expensed immediately when paid.

Limitations of Cash Basis Accounting

The inability to report expenses in the periods they relate to, which is contrary to the matching principle.