Modified Cash Basis

DEFINITION of 'Modified Cash Basis'

An accounting method that combines elements of the two major accounting methods, the cash method and the accrual method. The cash method recognizes income when it is received and expenses when they are paid for, whereas the accrual method recognizes income when it is earned (for example, when the terms of a contract are fulfilled) and expenses when they are incurred. The modified cash basis method uses accruals for long-term balance sheet elements and the cash basis for short-term ones.

BREAKING DOWN 'Modified Cash Basis'

Because both accounting methods have limitations, a business may use a modified cash method to develop what it feels is a more accurate picture of its finances. While the modified cash method may be used for internal purposes, this method does not comply with the Generally Accepted Accounting Principles that companies must follow when preparing their financial statements.