Definition
Cash basis accounting recognizes revenue on receipt and expenses on payment. It ignores receivables, payables, and prepaid items. A modified cash basis adds selected accrual items, commonly fixed assets and depreciation, long-term debt, or income taxes. Neither is US GAAP.
Why it matters in an audit or review
Cash-basis statements can be audited, reviewed, or compiled, but they are prepared under a special purpose framework. The auditor evaluates whether the framework is acceptable, whether the notes describe the basis and significant departures from GAAP, and whether the statement titles suit the basis, for example "statement of assets, liabilities, and equity, cash basis". The audit report must say the statements are prepared on the cash basis and refer to the note that describes it (AU-C 800). Completeness of recorded cash transactions, rather than cutoff of accruals, becomes the focus.
Example
A small contractor (illustrative) collects $400,000 in the year, pays $310,000, and has $60,000 of unpaid supplier invoices at year-end. Cash-basis net income is $90,000. On accrual, the $60,000 payable reduces income to $30,000 before other adjustments.
Common mistakes
- Using GAAP-style titles and notes for statements that are not GAAP.
- Presenting a modified cash basis without disclosing which accrual items were included.
FAQ
Can a lender require GAAP instead?
Yes. Credit agreements often specify GAAP, so a cash-basis client may need accrual statements for covenant reporting.
Sources
- AICPA, AU-C Section 800, Special Considerations, Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks
- AICPA, AR-C Section 80, Compilation Engagements
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error