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Cash Basis Vs Accrual Basis of Accounting

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Cash Basis Vs Accrual Basis of Accounting, We all have heard about the cash basis & accrual basis of Accounting, but here we will do a detailed analysis of these two forms of Accounting. We will study about what these two forms of Accounting are, what are the differences between them & when & where are these generally followed. Difference between Cash Basis and Accrual Basis of Accounting. Now you can scroll scroll down below n check more details regarding Cash Basis Vs Accrual Basis of Accounting

Cash Basis Vs Accrual Basis of Accounting

Let us start with understanding what these two forms of Accounting are:

1. Accrual basis of accounting:

  • In most of the places, we find that The Accrual Basis of Accounting is the more commonly followed Accounting System.
  • Accrual Basis of Accounting is a method of recording transactions by which revenue, costs, assets and liabilities are reflected in the accounts for the period in which they accrue.
  • This basis includes consideration relating to deferrals, allocations, depreciation and amortization.
  • This basis is also referred to as the mercantile basis of accounting.
  • Under The Companies Act 2013, all the companies are required to maintain their books of accounts according to the accrual basis of accounting.

2. Cash basis of accounting:

  • There are certain entities which account income & expense in the period in which there is an actual inflow or outflow of funds & not when the right to receive or pay the same arises. Such an entity is said to follow the Cash System of Accounting.
  • Cash Basis of Accounting is a method of recording transactions by which revenues, costs, assets and liabilities are reflected in the accounts for the period in which actual receipts or actual payments are made.

Must Read – Accounting Entries for Service Tax, VAT and TDS

What is the difference between these two systems?

Here is a list of various differences between the two forms:

Particulars Accrual Basis of Accounting Cash Basis of Accounting
When to be Accounted? Under this system, when the right to receive a particular income is established or the duty to pay for a particular expense is certain, it is accounted in the period for which they relate. Even if the income or the expense do not relate to the current period, still they can be provided for on Receipt/ Payment Basis.
Recognition under the Companies Act, 2013 This basis is recognized under the Companies Act, 2013. This basis is not recognized under the Companies Act, 2013.
Income & Expense Treatment in the Books of Accounts Under this, there may be prepaid/ outstanding expenses and accrued/ unaccrued incomes in the Balance Sheet. Under this, there is no prepaid/outstanding expenses or accrued/ unaccrued incomes
Higher/lower Income in case of prepaid expenses and accrued income Income Statement will show a relatively higher income Income Statement will show lower income.
Higher/lower income incase of outstanding expenses and unaccrued income Income Statement will show a relatively lower income. Income Statement will show higher income.
Profit & Loss Statement Here, the Profit & Loss statement is generally the Income & Expenditure Account. In this case, the Profit & Loss Statement is the Receipt & Payment Account.
Which form represents a true picture of the entity? Accrual Basis is considered to be reflect a better picture of the Income & Expenditure of the entity as compared to the Cash System of Accounting.

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About CA Ridhi Dhoot

The writer is a Chartered Accountant & a Licentiate Company Secretary. You can reach out to her at [email protected]

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