B) 1. Cash System of Book-Keeping

B) 1. Cash System of Book-Keeping:

     Cash system of book-keeping is a system of book-keeping under which entries for recording the transactions of a business are made only when cash is actually received or paid for those transactions. No entry is made for recording the transactions, when merely the right to receive cash for the transactions or the obligation to pay cash for the transactions arises. In short, cash system of book-keeping is a system of book-keeping under which only actual cash receipts and cash payments are recorded in the books of accounts, and credit transactions are not recorded at all until cash is actually received or paid for them. As only the items of cash received and cash paid are recorded under this system, this system is known as the cash system of book-keeping.

     Under the cash system of book-keeping, incomes are recognised, i.e., considered to be earned, only when they are actually received in cash, and expenses are recognised, i.e., considered to be incurred, only when they are actually paid in cash. That means, under the cash system, the revenues or incomes for a particular accounting year are taken to be only those incomes which are actually received in cash during that year, and expenses for a year are taken to be only those expenses which are actually paid in cash during that year. As such, under the cash system, the profit or loss for a particular year is ascertained by considering the items of revenues or incomes actually received in cash during that year, whether they relate to the current year or not (i.e., whether they relate to the current year or the previous year or the next year), and the items of expenses actually paid in cash during that year, whether they relate to the current year or not (i.e., whether they relate to the current year or the previous year or the next year).

     Cash system of accounting is in use in small business organisations, say, small retail stores, where most of the transactions take place in cash. It is also followed by non-trading organisations like clubs, educational institutions, hospitals, charitable institutions, etc. Certain professional men like doctors, lawyers, chartered accountants, engineers and manage consultants also keep their accounts on cash basis.