Cash Basis Vs Accrual Basis of Accounting: The difference

Cash Basis Vs Accrual Basis of Accounting, We all have heard about the cash basis and accrual basis of Accounting, but here we will do a detailed analysis of these two forms of Accounting. We will study what these two forms of Accounting are, what are the differences between them, and when and where are these generally followed. Must Check Going Concern Concept.

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 companies are required to maintain their books of accounts according to the accrual basis of accounting. Must Read How to Finalize Balance Sheet.

2. Cash basis of accounting:

• Certain entities account for income and expense in the period in which there is an actual inflow or outflow of funds and 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 Check What is Net Salary?

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

What is the difference between these two systems?

Here is a list of differences between the two forms:

Particulars	Accrual Basis of Accounting	Cash Basis of Accounting
When to be Accounted?	Recognition under the Companies Act, 2013	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 for in the period for which they relate.
Recognition under theCompanies Act, 2013	This basis is recognized under the Companies Act, 2013.	Under this, there are no prepaid/outstanding expenses or accrued/unaccrued incomes
Income and Expense Treatment in the Books of Accounts	Under this, there may be prepaid/ outstanding expenses and accrued/ unaccrued incomes in the Balance Sheet.	Higher/lower Income in case of prepaid expenses and accruedincome
The income Statement will show a relatively higher income	Higher/lower Income in case of prepaid expenses and accrued income	The income Statement will show a relatively lower income.
Higher/lower income in case of outstanding expenses and accrued income	The income Statement will show lower income.	Accrual Basis is considered to reflect a better picture of the Income and Expenditure of the entity as compared to the Cash System of Accounting.
Profit and Loss Statement	Here, the Profit and Loss statement is generally the Income and Expenditure Account.	In this case, the Profit and Loss Statement is the Receipt and Payment Account.
Which form represents a true picture of the entity?	The income Statement will show higher income.