Which scenario favors cash basis accounting?

• A. A small business that primarily pays and receives cash with little or no credit sales.
• B. A large manufacturer that extends credit to customers.
• C. A company with significant accounts receivable.
• D. A nonprofit using cash-basis reporting.

Answer: (A)

Cash-basis accounting is most suitable when a business operates mainly with cash transactions, because it records revenue when cash is actually received and expenses when cash is paid. In a small business that mostly handles cash with little or no credit sales, this approach aligns financial results with the real cash flow and keeps bookkeeping simple, avoiding the need to track accounts receivable or payable. The other situations involve extending credit or managing significant receivables, which require recognizing revenue when earned and tracking amounts owed, a hallmark of accrual accounting. A nonprofit that uses cash-basis reporting can work, but for many organizations, accrual provides a more complete view of resources and obligations. So the scenario with a small cash-focused business best favors cash-basis accounting.