What is modified cash basis?

Definition

Modified cash basis is a hybrid. Most day-to-day items still follow the bank, but a few large items are capitalized or accrued so the statements are not as thin as pure cash books.

This is still a method, not a full accrual-basis lesson. The hybrid keeps cash as the default and carves out a short list of exceptions.

Where it shows up

Balance sheet: Related to capitalizing equipment even when other items stay on cash.

P&L: Related to expenses that still follow cash, except the few that are accrued.

Cash flow: Related to cash still driving most of the activity.

See also: Cash Basis Accounting · Accrual Basis Accounting · Adjusting Journal Entry

When you look at the Balance Sheet, equipment and similar long-lived items usually appear even though receipts still follow cash. That is the point of the modification.

The Income Statement still dates most fees and supplies to the cash date. A capitalized purchase does not hit expense in one lump; depreciation expense takes a slice each period.

Cash still drives most of the activity. Cash flow from operations will look close to the day-to-day leftover, with a gap mainly where the exceptions live.

The Financial Statement Package under this hybrid is thicker than pure cash books and thinner than full accrual books. Readers should know which items were carved out.

How it works

Start with cash. Receipts, supply payments, and rent usually hit the statements when money moves.

How the hybrid is built:

• Keep day-to-day receipts and payments on the cash date
• Carve out a short list of exceptions (often equipment)
• Capitalize those exceptions on the Balance Sheet instead of expensing them on payday
• Spread capitalized cost with depreciation (and accrue any chosen extras)
• Leave most fees and supplies on cash; do not walk every accrual a full accrual shop would make

Then pick the exceptions. The common carve-out is equipment: pay for a long-lived asset, record it on the Balance Sheet, and spread the cost over the years it will be used.

Some shops also accrue a short list such as unpaid wages or a loan balance. Those extras are a choice, not a requirement of the name.

An adjusting journal entry is how the exceptions get onto the statements. The day-to-day cash items do not need that extra step.

Stay on the hybrid. Do not walk every accrual a full accrual-basis shop would make.

The documents behind it are the bank feed for the cash items and the asset list for the equipment. A simple note of which exceptions the shop uses keeps the method honest.

Net income under this method is not cash, because depreciation and any accrued extras move the leftover without moving the bank. It is also not full accrual profit, because most fees still wait for the deposit.

A deferral of unearned prepayments is one possible extra. Many hybrid shops skip it and stay with cash for fees.

Example

Cedar Hill Dental records day-to-day patient receipts when the card or check clears. June cleanings that settle in July are July revenue here.

The office also buys a $40,000 treatment chair in June and pays cash for it. Under this hybrid, that $40,000 is not June expense.

The chair sits as a fixed asset on the Balance Sheet. Each period a slice of depreciation expense hits the Income Statement.

If the shop had stayed on pure cash, June would show a $40,000 hit and every later month would ignore the chair. The hybrid keeps the chair on the statements for the years it is used.

June patient receipts still follow the bank. The only method change in this story is the chair.

Common mix-ups

Modified cash basis is not the same as cash-basis accounting. Pure cash would expense the chair the day it was paid; this hybrid capitalizes it.

Modified cash basis is not the same as accrual-basis accounting. Most fees and supplies still wait for cash; only the carved-out items get the extra treatment.

Modified cash basis is not a compilation. A compilation is a level of accountant service; this hybrid is a bookkeeping method the statements can follow.

Related terms

• Cash Basis Accounting: Recording revenue and expenses only when cash actually moves.
• Accrual Basis Accounting: Recording revenue when earned and expenses when incurred.
• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Financial Statement Package: The bundled set of statements and schedules delivered after a close.
• Depreciation Expense: The periodic charge that spreads a fixed asset's cost over its useful life.
• Compilation: An accountant's lowest level of service, presenting statements without assurance.
• Deferral: Pushing recognition of a cost or revenue to a later period than the cash movement.