Frequently, i have been consulted by my friends or businessman on the application of cash basis accounting. There are a lot of businesses in Malaysia still using cash basis in preparing the management report.
Cash Basis Accounting
Cash basis accounting requests the company to record a business transaction when payments are made or cash are received by the company. For example, sales are recognised when customers make payments and purchases are recognised when payments made to suppliers.
I need to reiterate that cash basis accounting is not acceptable in Malaysia. In Malaysia, under the MASB 1 issued by the MASB (Malaysian Accounting Standards Board), the accounts shall be prepared under Accruals Basis.
Accruals Basis Accounting
Accruals basis accounting requires the company to recognise a transaction when it incurs. For example, sales are recognised when goods are delivered and accepted by the customers. The non payment of debt has nothing to do with the sales recognition. The non payment from the customers will be reflected as trade debtors under the company's assets category.
Besides that, purchases are recognised when goods are accepted by the company. The non payment of suppliers' goods will be reflected as trade creditors under the company's liabilities category.
Hope this article helps to clear the misunderstanding of Cash Basis Accounting.
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